30 October 2015

Fraudster using loans to try to get around English Freezing Order

Stephen Ross
Partner | UK

JSC BTA Bank v Mukhtar Ablyazov and Others [2015] UKSC 64

Does the standard form of English Freezing Order bite on loans held by the Defendant where he has the power to direct how the proceeds are disposed of? The Supreme Court recently looked at this question purely in terms of the interpretation and application of the standard form of English Freezing Order.

The Court dealt with three questions:

1) Is the Defendant's right to draw down under a loan agreement an 'asset' within the meaning of a Freezing Order?

Answer: 'No'

2) If so, when exercising that right to direct the lender to pay the sum to a third party is the Defendant 'disposing of' or 'dealing with' or diminishing the value of an asset?

Answer: 'No'

3) Are the proceeds of the loan agreements 'assets' on the basis of the extended definition in that the Defendant had the power to directly or indirectly dispose of or deal with the proceeds as if they were his own?

Answer: 'Yes'  


Before and after the Freezing Order was granted, the Defendant, Mukhtar Ablyazov, entered into various loan agreements under which over $16m was directed to be paid out to various parties, including his former solicitors and solicitors acting for his co-defendants.

The Bank applied to the Court for, amongst other things, declarations that if the loans were valid then then the Defendant's rights under them were assets for the purposes of the Freezing Order and any drawings could therefore only be made pursuant to the exceptions provided for in the Order, namely the £10,000 per week living expenses and reasonable legal fees agreed in advance.

The Supreme Court's approach

Endorsing the approach of the Court of Appeal, the Supreme Court said that it would not be tempted to stretch any legal analysis to capture what are seen as the merits of the case. The question was simply one of interpreting the Freezing Order. If a broader meaning was required then the way to achieve that was to vary the order (and the standard form of order) for the future. Freezing Orders are to be construed restrictively not least because of the fundamental requirement for any injunction directed at an individual that it be certain. With penal consequences for potential breaches, a defendant must know where he stands and so the orders need to be clear. 

The rights of the Defendant such as those under the loan agreements could in principle be 'assets' in ordinary legal parlance. However, that was not of much assistance in the context of a Freezing Order. Freezing Orders have traditionally been targeted at assets that would be available to the judgment creditor and that should be preserved pending judgment. Case law over the years has also settled that borrowings were not covered by the standard form of Freezing Order. The Supreme Court declined to reverse previous decisions by finding that the right to draw down loans was an asset.

However, the Supreme Court did disagree with the Court of Appeal and allow the Bank's appeal on the final ground. It held that where the Defendant had the power to direct the lender where to pay the funds that it was contractually obliged to make available to him that would be caught by the extended definition in the standard Freezing Order. The focus of the extended definition was not on assets that the defendant owned legally or beneficially, but on assets he didn't own but had the power to dispose of or deal with as if he did.

The practical consequences may be limited in the case itself as the Defendant is already in contempt of court for breaches of court orders, but in future cases it will be clearer that fraudsters cannot construct a way around the effect of the standard freezing order by using loan agreements to cover expenses. 

Where this leaves the law firms who received the proceeds of the loans paid away in breach will be closely watched by many civil fraud lawyers in England.

Category: Article