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Freezing injunctions in relation to arbitral proceedings

9th July 2020

Freezing injunctions in relation to arbitral proceedings

Petrochemical, Mr Krueger v PSB Alpha, Mr Ghertsos [2020] EWHC 975

This is an application by the Claimants’ to continue a freezing injunction (“the Injunction”) which was granted on an ex parte basis on 13 March 2020 by order of Henshaw J (the “March Order”) and continued pending the handing down of this judgment.

The March Order provides (at paragraphs 1 and 2) that:

1. the Defendants shall not in any way:

a) dispose of, transfer or deal in the shares of Alpha Terminals;

b) dispose of, deal with or diminish the assets of Alpha Terminals; and

2. Mr Ghertsos shall not in any way dispose of, transfer or deal in the bearer share certificate or certificates of PSB Alpha.

Thus, the Injunction protects the shares and assets of Alpha Terminals as well as the bearer shares of PSB Alpha.

Background

The Claimants are Petrochemical Logistics Ltd (“Petrochemical”) and Mr Krueger. Petrochemical is a company registered in Gibraltar. The Defendants are PSB Alpha AG (“PSB Alpha”) and Mr Ghertsos. PSB Alpha is a company registered in Switzerland with shares in bearer form i.e. the shares are not registered in the corporation’s files and are payable only to the person who has possession of the bearer share certificates. PSB Alpha owns Alpha TerminalsBV (“Alpha Terminals”), which is a company registered in The Netherlands.

Alpha Terminals owns land where a storage terminal for oil and petroleum products will be built (the “Vlissigen Project”). Petrochemical entered into a loan agreement, in connection with the Vlissigen Project, for CHF 50,000 to PSB Alpha. The agreement provided for the use of The London Court of International Arbitration (LCIA) should a dispute arise.

The Claimants state that:

i) pursuant to a share purchase agreement dated 25 November 2019 (the “November SPA”) Mr Ghertsos sold his 100% shareholding in PSB Alpha to Mr Krueger; and

ii) pursuant to a share purchase agreement dated 16 January 2020 (the “January SPA”) PSB Alpha sold its shares in Alpha Terminals to Petrochemical.

The November SPA is governed by Swiss law and disputes are to be referred to a Swiss arbitration. The January SPA is governed by English law and disputes are to be referred to an English arbitration. No arbitrator was appointed in either arbitration.

Mr Ghertsos did not deliver the bearer share certificates in PSB Alpha to Mr Krueger. Despite the lack of delivery of the bearer share certificates, Mr Krueger purported to pass a shareholder resolution removing Mr Ghertsos as director of PSB Alpha and appointing himself as director.

The Defendants argue that Mr Krueger did not own the shares in PSB Alpha as they are bearer shares and were not in his possession. Accordingly, Mr Krueger was not the owner of PSB Alpha and could not validly appoint himself as the director of PSB Alpha, nor validly enter into an agreement to sell the shares in Alpha Terminals to Petrochemical. In light of this disposition, Mr Ghertos sold the shares to AT Holdings Ltd, a company registered in the Netherlands and a subsidiary of Century Capital Management Ltd (“Century”).

The Claimants argue that when Mr Ghertsos failed to deliver the shares in PSB Alpha, a deposit agreement was created such that the shares were held to the order of Mr Krueger. The Defendants stipulate that the shares in PSB Alpha, and ownership of them, remain (as to Mr Ghertsos’ holding) at the offices of his lawyer in Switzerland.

When Mr Krueger contacted Century via email, he stipulated that on 16 January 2020, Petrochemical purchased the shares of Alpha Terminals from PSB Alpha. Mr Krueger did not want to enter into a sale on the terms offered by Century.

Century wrote to Mr Krueger asserting that they had an agreement for the purchase of the shares in Alpha Terminals and repeatedly asked Mr Krueger for proof of his authority to act for PSB Alpha as well as proof of his acquisition of the shares in that company. No such proof was provided by Mr Krueger.

The Defendants obtained an injunction (the “Swiss Injunction”) from the Swiss courts against Mr Krueger which prevents him from “interjecting himself” in the business affairs of PSB Alpha, which is being challenged by Mr Krueger.

Should the freezing injunction continue?

The requirements for a freezing injunction are as follows:

  • The applicant must have a cause of action, that is, an underlying legal or equitable right.
  • The applicant must have a good arguable case.
  • The existence of assets.
  • There must be a real risk of the respondent’s assets being dissipated.

Cause of Action

The injunctive relief is sought pursuant to section 44(2)(e) of the Arbitration Act 1996 (“Act”) and/or section 37 of the Senior Courts Act 1981 (“SC Act”).

Section 44 of the Act provides that, unless otherwise agreed by the parties, the court has for the purposes of and in relation to arbitral proceedings the same power of making orders as it has for the purposes of and in relation to legal proceedings. Section 44 proceeds with a list of matters the court had power to make orders, including the granting of an interim injunction at sub-section 44(2)(e).

Section 37 of the SC Act states that “[t]he High Court may by order (whether interlocutory or final) grant an injunction … in all cases in which it appears to the court to be just and convenient to do so.”

Good arguable case

It was accepted by the Defendants for the purposes of this application that the Claimants had a good arguable case.

Assets

It was accepted by the Defendants that the shares in PSB Alpha were assets which could be the subject of a freezing order.

In relation to the shares and assets of Alpha Terminals, it was demonstrated in Ras Al Kaimah v Bestfort [2018] 1 WLR 1099 at [39] that there must be grounds for believing that the defendant to a freezing order has assets otherwise no injunction will be granted.

As reiterated by Floyd J in HMRC v Cozens [2011] EWHC 2782 (Ch) at [41]:

“the evidence of the existence of assets need not be specific: indeed it may in some cases be unreasonable to expect a party seeking such an injunction to have evidence of precisely what assets his adversary in litigation has. But there must be some material from which it is reasonable to infer or deduce that there are assets on which the injunction will bite. Otherwise the court will run the risk of acting in vain.”

As such, Moulder J stated in Petrochemical at [47] that:

“it cannot be said that there are grounds for believing that the shares of Alpha Terminals which are registered in the name of AT Holdings are assets of the defendants and accordingly the injunction sought cannot bite.”

Risk of dissipation

Moulder J subsequently stated that even if wrong as to the existence of assets upon which the injunction could bite, Century repeatedly asked for evidence of the authority of Mr Krueger in relation to the sale by PSB Alpha, which was not provided. Thus, Moulder J stipulated that the evidence does not establish a good arguable case that there is a risk that PSB Alpha or Mr Ghertsos will dissipate the shares or assets in Alpha Terminals, which had already been transferred to AT Holdings. [48-49]

In relation to the shares of PSB Alpha, Moulder J stated that it was sufficient to conclude, based on the conduct of Mr Ghertsos in entering into a sale of PSB Alpha’s bearer shares to Mr Krueger but failing to deliver them, that there was a risk of dissipation.

However, the Court had to take into account the fact that the seat of the arbitration for the dispute in relation to the shares in PSB Alpha is outside England and Wales. In Mobil Cerro Negro v Petroleos de Venezuela [2008] 1 Lloyd’s Rep 684 Walker J said at [119]:

“this court will only be prepared to exercise discretion to grant an application in aid of foreign litigation for a freezing order affecting assets not located here if the respondent or the dispute has a sufficiently strong link here or, in cases where the European jurisprudence referred to by Potter LJ at paragraph 114 of Motorola (No. 2) does not apply, there is some other factor of sufficient strength to justify proceeding in the absence of such a link.”

The Defendants relied on ICICI Bank UK plc v Diminco NV [2014] EWHC 3124 (Comm) at [27] for the proposition that where the respondent is resident and domiciled outside England and Wales; is not subject to the in personam jurisdiction of the English court; and has no assets in England, the English court should only grant injunctive relief in exceptional circumstances.

These circumstances include, but not limited to

  • there is a real connecting link between the subject matter of the measure sought and the territorial jurisdiction of the English court;
  • where it is appropriate within the limits of comity for the English court to act as an international policeman in relation to assets abroad;
  • it is just and expedient to grant worldwide relief, taking into account the discretionary factors such as i) whether the making of the order will interfere with the management of the case in the primary court; ii) whether it is the policy in the primary jurisdiction not itself to make to make worldwide freezing/disclosure orders; iii) whether there is a danger that the orders made will give rise to disharmony or confusion and/or risk of conflicting, inconsistent or overlapping orders in other jurisdictions, etc.

The Claimants stated there was sufficient jurisdictional connection because:

i. Mr Ghertsos is a British national; there is no reason to believe that Mr Ghertsos as a British national would disobey an order of the English court;

ii. there is a close connection between the January SPA (governed by English law) and the November SPA, which was intended to facilitate the sale of the shares in Alpha Terminals to Petrochemical; the sale of the shares in PSB Alpha was merely an intermediate step;

iii. these proceedings were not in breach of the Swiss Injunction as Mr Krueger has taken no steps on behalf of PSB Alpha in these proceedings;

iv. The making of the order will not interfere with the management of the case in the Swiss arbitration;

v. The Swiss Court in Zug which could grant an attachment over the bearer shares would have limited powers in the circumstances to impose a meaningful fine.

The Defendant submitted that:

i. Mr Ghertsos is a British citizen but (since 2012) neither domiciled nor resident here;

ii. the November SPA is governed by Swiss law;

iii. there is no evidence in the documents that the two contracts were linked; that may have been the intention of Mr Krueger but there is nothing to indicate in the November SPA that it was a back-to-back contract;

iv. Mr Krueger could have applied to the district court of Zug to restrain Mr Ghertsos from dealing with the bearer shares pending the outcome of the Swiss arbitration and that there is no reason to believe that the Swiss court would not have acted with appropriate expediency; even though the penalties for breach of an order are greater in England, the English court is not the international policeman and the scale of the penalty is not enough to justify the order being granted;

v. the continuation of the March Order contradicts the Swiss Injunction.

Moulder J found that the email correspondence between Mr Krueger and Century indicated that the transfer of the shares between Mr Ghertsos and Mr Krueger was not merely an intermediary step to selling them to Petrochemical because Mr Krueger was willing to contemplate a sale to Century if suitable terms could be agreed.

Moulder J also found at [60] that “[w]hilst an order of the English court may not interfere with the management of the Swiss arbitration, there must be a risk of overlapping orders being sought in the Swiss courts and there is no countervailing factor or sufficient connection which in my view tips the balance in favour of an order of the English court.” Moulder J continued, “I do not accept that the English court should make an order by reason only of the alleged inadequacy of the penalty under Swiss law.” As such, Moulder J found that there was an insufficient connection with the English court in the circumstances and so the court declined to exercise its discretion to continue the injunction against Mr Ghertsos in respect of the shares in PSB Alpha.

Therefore, for the reasons of an insufficient connection with the English courts concerning the shares in PSB Alpha, as well as the fact that the defendants do not have Alpha Terminals’ assets and there is no risk of dissipation to the shares in Alpha Terminals, the application to continue the Injunction was refused.

Additional hurdles?

Section 44(5) of the Act provides that:

“In any case the court shall act only if or to the extent that the arbitral tribunal, and any arbitral or other institution or person vested by the parties with power in that regard, has no power or is unable for the time being to act effectively.”

Moulder J accepted that since the arbitral tribunals had not yet been constituted, this section was satisfied.

In fact, it is easiest to satisfy section 44(5) when the tribunal has not been constituted because there is no potential conflict between the court and arbitral tribunal. Section 44(5) stresses the respect the law gives to tribunals. Generally-speaking, those seeking to use the powers of section 44 are encouraged to apply to the court before a tribunal is constituted, to ensure the greatest chance of satisfying s44(5).

Section 44(3) of the Act provides that:

“If the case is one of urgency, the court may, on the application of a party or proposed party to the arbitral proceedings, make such orders as it thinks necessary for the purpose of preserving evidence or assets.”

The Claimants stated the case was urgent because the tribunals not yet been put in place; once they are, subject to the powers of the arbitrator, section 44(5) is unlikely to be met and the court may not be able to act.

Even though the injunction was not granted, and so this hurdle did not need to be discussed, Moulder J nonetheless stated that the requirements of section 44(3) in relation to the shares and assets of Alpha Terminals had not been made out. The shares had already been transferred to AT Holdings and the evidence does not support an inference that an injunction is “necessary for the purpose of preserving these shares or assets”. [63]

Commentary

Moulder J mentioned the ratio of Haddon Cave LJ in Lakatamia Shipping Company Limited v Toshiko Morimoto [2019] EWCA Civ 2203:

“An applicant for a freezing order does not need to establish the existence of a risk of dissipation on the balance of probabilities. It is sufficient for the applicant to prove a danger of dissipation to the ‘good arguable case’ standard.”

It was also quoted in Ras Al Kaimah v Bestfort [2018] 1 WLR 1099 at [39] that a test of “likelihood” on its own is inappropriate; the right test must be either a “good arguable case” or “grounds for belief”, used interchangeably. Therefore, the burden is lower to establish, and claimants need only show a case that is more than merely fanciful.

The Claimants argued that AT Holdings had entered into an agreement with a person despite arguably not having authority to sell and not acting with candour. Moulder J nevertheless stated that there is no risk of dissipation because, as emphasised in Lakatamia Shipping, the risk of dissipation must be an unjustified dissipation. A freezing injunction is not to provide general security for a claim, nor to constrain a respondent from operating its business in a legitimate way, but rather to stop the illegitimate dissipation of assets.

Pending full arbitration over the share agreements, AT Holdings were conducting business in a legitimate way and a freezing injunction is not meant to hinder this. It was helpful to Century that they acted reasonably by asking repeatedly for evidence of the authority of Mr Krueger in relation to the sale by PSB Alpha as it indicates they are being upfront. They were simply trying to establish Mr Kreuger’s claim with evidence and not acting in an impugned manner. Parties seeking to avoid freezing injunctions against them should be reminded to be open, correspondent and communicative, as it indicates a legitimacy in their endeavours, with nothing to hide and no need for a freezing order to freeze assets pending trial.

The actions of Century alleviated the concern of any risk of dissipation in relation to the shares and assets of Alpha Terminals. On the other hand, despite finding there was a risk with the shares in PSB Alpha, Moulder J nonetheless stated there was an insufficient connection with England and Wales to justify the granting of the freezing order.

Parties involved in foreign-seated arbitrations still have recourse to section 44 of the Act. However, if there is a contemporaneous trial taking place in another jurisdiction, parties need to demonstrate that there is no risk to the management of cases between jurisdictions, and no risk that orders from separate jurisdictions will overlap, or that there is a significant reason why an order from an English or Welsh court is essential. These stipulations make for a remarkably high burden to establish, especially considering the likelihood of similar remedies resulting from any case and the relationship of factors. The rationale for the high burden lies with the pursuit of comity between international jurisdictions and the alleviation of disharmony. Parties seeking to avoid disharmony, and rejection of the freezing order, ought to identify the differences in the management and order sought in the separate jurisdiction from that sought in England and Wales. This identification can be shown through multiple ways, including an emphasis of the different remedies sought and the consequences of the remedies (especially considering the finances of a company), the specific dates of issuing documentation and when the trials will commence, etc. This task may not be as simple as it appears, and Petrochemical acts as a reminder that, when there is a concurrent trial in another jurisdiction, the threshold is quite arduous to demonstrate no conflict between trials.

A version of this article was first published in Thomson Reuter’s Practical Law Arbitration Blog.

This content is provided free of charge for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.

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