Freezing Injunctions - Organic Grape Spirit Ltd v Nueva IQT, SL

By fir0002flagstaffotos [at] gmail.com
Canon 20D + Sigma 150mm f/2.8 - Own work, GFDL 1.2, 

Jane Lambert

Court of Appeal (Lord Justices David Richards, Newey and Arnold) Organic Grape Spirit Ltd v Nueva IQT, SL [2020] EWCA Civ 999 (28 July 2020)

An order to restrain disposal of assets worldwide and within England and Wales is called a "freezing injunction." An example of such an injunction can be found in the Annex to Practice Direction 25A - Interim Injunctions.   Before the Civil Procedure Rules came into force, freezing injunctions were called "Mareva Injunctions" after Mareva Compania Naviera SA v International Bulkcarriers SA (The Mareva) [1975] 2 Lloyd’s Rep 509, [1980] 1 All ER 213.  In that case, Lord Denning MR said: "If it appears that the debt is due and owing, and there is a danger that the debtor may dispose of his assets so as to defeat it before judgment, the court has jurisdiction in a proper case to grant an interlocutory judgment so as to prevent him disposing of those assets."  Freezing injunctions are an increasingly important tool in IP enforcement as such orders can cut off funds to infringers whose identity and whereabouts are unknown or who are beyond the jurisdiction of the courts.

Although the test for a freezing injunction is "whether … the court concludes, on the whole of the evidence then before it, that the refusal of a Mareva injunction would involve a real risk that a judgment or award in favour of the plaintiffs would remain unsatisfied" (see Ninemia Maritime Corp v Trave Schiffahrts GmbH (The Niedersachsen) [1983] 1 WLR 1412, 1422) those orders have always permitted spending on normal living expenses, legal advice and representation and in "the ordinary and proper course of business" (see the exceptions to the order in the Annex).  Of course, it is always possible for these exceptions to be abused and the court has to be astute to prevent such abuse.

On 15 March 2020 Nueva IQT SA ("Nueva"), applied without notice to Mr Justice Nugee for a freezing injunction in support of proceedings in Spain to challenge an agreement to lend up to €20 million to Organic Grape Spirit Ltd. ("Organic").  The purpose of the loan was to enable Organic to produce spirits with tailored flavours that could meet the standard of different markets by, first producing the desired aromatic compounds in the fermented wine and then to separate them with extreme precision and to blend them subsequently into the final product.

Mr Justice Nugee granted the order but made it clear that he did not regard spending money on developing a start-up business as "dissipation". He did not think there was anything in the point that because Organic was a start-up it could not be said to have an "ordinary course of business." Dissipation, as he understood it meant an unjustified removal or disposing of assets in order to avoid (or with the effect of avoiding) a judgment debt.  Genuinely trying to develop a new business is not dissipatory even if the business may be imprudent, even if the business plan may be sketchy and somewhat shaky. Trying to develop a business is not the same as avoiding a judgment.

On the return day, the proceedings came on before Mr Justice Morgan who took a different view.  He renewed the injunction and inserted a new paragraph 4 (4) into the order restraining Organic from dealing with, disposing of or diminishing the value of any of its assets so as to develop any new business or enterprise including but not limited to the business of producing alcohol and related products as described in its business plan ("the Business Plan").   The order still allowed Organic to deal with or dispose of any of its assets in the ordinary and proper course of business provided it gave Nueva's solicitors 7 days' notice of its intention to do so in respect of any transaction exceeding € 10,000 in value. A new paragraph 10 (2) made clear that Organic was not permitted to rely on that paragraph in order to deal with, dispose of or diminish the value of any of its assets so as to develop any new business or enterprise including but not limited to the business of operating a business of producing alcohol and related products as described in "the Business Plan".

In reaching his decision, Mr Justice Morgan relied heavily on the Australian case Harrison Partners Construction Pty Ltd v Jevena Pty Ltd [2005] NSWSC 1225, (2005) 225 ALR 369.   In that case, a defendant wished to pursue a new business venture in respect of which there was "a bona fide, albeit undeveloped, business plan".  Mr Justice Brereton refused to allow him to do so.   He said at paragraph [47] of his judgment:

"notwithstanding that I am not satisfied that there is a risk of dealing with intent to produce the result that Jevena be judgment proof, I am satisfied both that there is a real risk of dealing liable to produce that result, and that the voluntarily [sic] investment of Jevena's sole asset in a speculative venture when faced with a substantial claim which if successful would exceed its assets, would be an abuse of its power of disposition in the relevant sense".

Mr Justice Morgan held that an applicant need not show that a respondent is attempting to evade successful enforcement of a judgment to obtain a freezing order. The question is whether the effect of the relevant dealing is likely to be the reduction of the assets available for execution.

Organic appealed to the Court of Appeal against Mr Justice Morgan's additional restrictions imposed by paragraph 4 (4) and 10 (2) of the freezing injunction.  The appeal came on before Lord Justice David Richards, Lord Justice Newey and Lord Justice Arnold on 14 July 2020.  Delivering the lead judgment in Organic Grape Spirit Ltd v Nueva IQT, SL [2020] EWCA Civ 999 (28 July 2020) Lord Justice Newey said that the appeal raised a question as to when, if ever, a company against which a freezing order is made should be permitted to pursue a fledgeling business.  The appeal, in his view, raised two main issues:

• Would the pursuit of the business outlined in the Business Plan be in the "ordinary and proper course of business"?
• If not, should Mr Justice Morgan nonetheless have sanctioned dealings and disposals in pursuit of that business?

On the first issue, Lord Justice Newey thought that the proposed expenditure would not be in the "ordinary" course of business.  Organic could be described as having "commenced business" and had spent substantial sums on acquiring equipment for its venture but it had not progressed as far as either sales or manufacture. It was some way off even having everything that it would need to start production.   A defendant in Organic's position, which had not established a pattern of trading, could not simply rely on the "ordinary and proper business" exception to a freezing order.  It must specifically ask the Court to authorize pursuit of its fledgeling business.  The protection afforded by a freezing order could be significantly eroded if a defendant could claim that a transaction fell within the "ordinary and proper business" exception when there was no benchmark against which the activities could be assessed.

As for the second issue, Nueva reminded the Court of Appeal of the limited circumstances in which it is entitled to interfere with a judge's exercise of his discretion.  Although he did not say so in terms, it may be inferred from Lord Justice Newey's judgment that he thought that Mr Justice Morgan had been wrong.  As he had relied on Mr Justice Brereton's judgment in Harrison Partners, Lord Justice Newey said at [24] that he did not consider Mr Justice Breeton's approach to accord with the law of England and Wales.  Consequently, neither did Mr Justice Morgan's.   The judge had found the proposed business to be risky and speculative but not even Nueva had suggested that it was improper. He did not say that it was without prospects of success or even that its chances were poor.  In Lord Justice Newey's view, Organic should be allowed to pursue its fledgeling business.  His lordship allowed the appeal and deleted paragraph 4 (4) and the word "not" in paragraph 10 (2) of Mr Justice Morgan's order.  Lord Justice Arnold and Lord Justice David Richards agreed.

Anyone wishing to discuss this judgment or freezing injunctions generally should call me on +44 (0)20 7404 5252 during normal office hours or send me a message through my contact page.