January 2011 What was JSC BTA Bank v A about?

Well, given present snowy weather, I thought it seemed topical to talk about freezing orders.
JSC BTA Bank v A is an important decision from the Court of Appeal concerning a high net worth defendant.

Freezing orders is where you get an injunction freezing the other side’s bank account, isn’t it?

That’s it. And all their other assets too.
One of the less publicised consequences was that it carried with it the requirement that its unhappy recipient has to disclose a list of his assets, usually of a value of over £5,000. This is to be verified by him on affidavit some days later.
The purpose of this was to identify for one applicant those assets he had frozen, allowing him to ensure appropriate notices were given to any banks and brokers who need to be notified of the order that bound the assets in the charge. More usefully it provided the applicant with a road map to the assets he would later wish to enforce against if he obtained later judgement.

So one just makes a list?

For many of us, providing a list of such assets, although intrusive, is a simple enough task. Mr Middle-Income may have a car, a house, a bank account, maybe an ISA or two, some shares and a pension.
For the seriously wealthy, this may prove more problematic.

Why so?

To protect their assets from tax men, grasping ex spouses or worse, often sophisticated structures are set up to distance the wealthy from the assets they formerly owned.
A common route is to hold the assets through a discretionary trust of which Mr Seriously-Wealthy is merely one of a group of possible beneficiaries. He may merely enjoy the trappings of his apparent wealth at the sufferance of a trustee in a Caribbean trust corporation.
The mark of real wealth is therefore not actually owning anything at all.
It seems like a really good wheeze to Mr Seriously-Wealthy when his clever accountant excitedly explains the benefits of his new tax free life. If, of course, the accountant adds he will need to be discreet about the full details of trust because if the trustee’s discretion is not real, the whole thing could, potentially, be unwound.

Why could this be a problem?

It all starts to go horribly wrong therefore when the freezing order lands on the desk of Mr Seriously-Wealthy and he has to explain to some stony faced judge why and how he successfully blagged his way onto the rich list and yet produced an affidavit saying he owned little more than his cufflinks. Only one version could be true. Whichever one it is, Mr Seriously-Wealthy suddenly looks like a liar.

So what happened in JSC BTA Bank v A?

When Mr A received a freezing order in proceedings brought against him by JSC BTA Bank, of which he had formerly been chairman, his initial coyness about his assets was to set him on a path that he could not have possibly foreseen.
The Court of Appeal was therefore unimpressed that Mr A left off his assets a property he owned, stating “There is no mention of Eurasia Tower at all in his first two affidavits and an asset the size of Canary Wharf can hardly have slipped Mr A’s mind.”
The bank also drew the Court of Appeal’s attention to sale by Mr A of shares held through his companies.

What was the issue with the shares?

The shares raised interesting questions because Mr A sought declarations from the court that his disposal of shares fell within the ordinary trading exception.

What is the ordinary trading exception to a freezing order?

Ordinary trading is a common exception to the restraint under a freezing order. It is an important exception. This is because a freezing order stops the respondent from being able to sell or deal with any of his assets or money. This can be highly oppressive and could cripple a business. Recognising this, the court will usually allow businesses to continue their ordinary trading activities without needing the court's permission. Where you are looking at, say, a market trader, what that means is self evident; he can carry on buying and selling fruit and vegetables.
Was the sale of shares by Mr A in his ordinary business? The court's message was stark. The Court of Appeal said that it did not matter how wealthy the respondent may be – unless his business is as a share trader – any sale of shares would be a breach of the injunction. If he needs to sell he needs first to get the court's permission or he will risk being in contempt of court. It was therefore clear that the order had been breached.

What did the court do?

The court’s solution was unusual. It imposed a receivership order over Mr A’s assets – something in the region of £4bn’s worth.

What does a receivership involve?

A receivership order is one of the most extreme remedies the court has at its disposal. In essence the court wrests control of the respondent's assets out of the hands of the respondent into the hands of a court officer.

When will the court appoint a receiver?

The court in the JSC BTA Bank case set out markers to explain when the court will take this extreme step. The court said that what was needed was strong evidence that the terms of the freezing order were being breached, there was imminent risk of loss and that there was a measureable risk that the freezing order would not be sufficient protection because of the way the respondent held his assets.
Where the respondent held his assets through a trust or nominee, as Mr A did, was just such a case when the court would be prepared to give teeth to its order in this way.
This sets a frightening marker for the seriously wealthy who traditionally structure their assets in this way.