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Technical breach of a freezing order

Author: Nicola Sharp  7 October 2021
4 min read

Posted in: Freezing Order.

Nicola Sharp of Rahman Ravelli details a case that assessed the use of a court’s time and resources in relation to a technical breach of an order

In Pharmagona Limited v Mr Sayed Mostafa Taheri, Mrs Bahereh Mohammadi [2021] EWHC 2537 (Ch), the High Court refused to issue and certify an application for contempt proceedings against the defendants, stemming from a technical breach of a freezing injunction. The court considered the motives behind the application and whether it was worthy of court time.

Case Background

In February 2018, a freezing order was granted in favour of Pharmagona Limited, (the claimant) against Mr Taheri and Mrs Mohammadi (the defendants). The defendants were employees of the claimant, and it was alleged that they had engaged in fraudulent activities involving fictitious invoices to misappropriate the claimant’s funds. The defendants claimed to be whistle-blowers and denied liability. They contended that the transactions were initiated by the claimant’s director in connection with the illegal export of goods to Iran. 

The freezing order provided that the defendants should not remove from the jurisdiction or in any way dispose of, deal with or diminish the value of any of their assets in England and Wales up to the value of £500,000. 

An unless order was then obtained by the claimant in December 2019 for disclosure of certain documents by the defendants. The defendants did not comply with this order and the claimants sought judgment on the claim. This was granted in the sum of £454,112.58 in January 2020. The defendants made an application for permission to appeal the judgment, but this was refused by the Court of Appeal in August 2020. 

Following the judgment, the claimant discovered that unilateral notices had been registered against the title to the defendants’ property in Stockport by two individuals. The defendants’ explanation for those notices was that the two individuals were friends of the defendants and were approached by them, in or around July 2019, regarding financial assistance for the defendants’ family members in Iran. These two individuals borrowed sums from two financial institutions and, in turn, loaned the funds to the defendants under loan agreements dated 30 and 31 July 2019. The agreements record that loans had been paid to the defendants and that they had promised to repay the funds with interest. One of the terms of both loan agreements was that the loans had been made to the defendants “due to their unforeseen circumstances with their family in Iran”. 

There was no suggestion by the claimant that the loans were used for anything other than the defendants’ family members in Iran, or that the loan agreements were a sham. The defendants ultimately did not pay the loans back and, therefore, the two individuals registered unilateral notices against the defendants’ property as security for repayment of the loans. 

Contempt Application

The claimant’s argument was that borrowing monies and paying those funds to their family members in Iran - while their assets in England and Wales were under £500,000 - was a breach of the freezing order. The claimant had requested that the defendants receive custodial sentences for the contempt.

The first defendant provided evidence that the funds were transferred directly to the family members in Iran and were not in the defendants’ hands at any time. There was no clear evidence as to what happened with the funds, other than that they were transferred to Iran. 

The claimant’s first attempt to issue the contempt application was refused by HHJ Stephen Davies on 27 July 2020, who struck out the application. 
He said: “Whilst I am prepared to accept that it is at least arguable that such conduct amounts to a breach of the freezing injunction…such breach is of the most technical kind and it is highly unlikely that any court would, on those facts, impose any penalty, let alone a custodial penalty.’’

He added:  “In the circumstances I am satisfied that this is a vindictive application which is not brought for legitimate aims but solely with the intention of harassing the first defendant and, in consequence, amounts to an abuse of process. Further or alternatively, it is not in accordance with the overriding objective to allow further court time and judicial resource to be taken up by an application of such nature brought in such circumstances."

Separately, the defendants had both been made bankrupt on their own petitions. A trustee in bankruptcy had been appointed in each of their cases and, therefore, the assets had been vested in the respective trustees. 

Judgement

The claimant made an application to set aside the order striking out the application. But in considering this, Mr Justice Snowden referred to Sectorguard plc v Dienne plc [2009] EWHC 2693 (Ch), where it was said the overriding objective and the interests of all parties should be considered - including expenditure and use of court’s time and resources - when considering whether litigation would be an abuse of process. 

That judgment took the position a step further when considering contempt proceedings: “The concept that the disproportionate pursuit of pointless litigation is an abuse takes on added force in connection with committal applications. Such proceedings are a typical form of satellite litigation, and not infrequently give rise to a risk of the application of the parties' and the court's time and resources otherwise than for the purpose of the fair, expeditious and economic determination of the underlying dispute, and therefore contrary to the overriding objective as set out in CPR 1.1.” 

The claimant’s application was refused, confirming the position of the lower court. Mr Justice Snowden confirmed that even if the funds in question had passed through the defendants’ hands, the defendants were merely a conduit for the funds to be given to the family members in Iran. The defendants had not intended for the funds that belonged to them to be dissipated, as denoted in the terms of the loan agreements. It was never intended for the funds to be at the defendants’ free disposal or for them to be used for any other purpose. It was arguable whether the funds would be caught by the freezing order at all, or by the most technical breach of the order. As the defendants had already become bankrupt and the assets controlled by the trustees, it was considered an appropriate result of the overall proceedings.

Conclusion

Had Mr Justice Snowden allowed the committal proceedings to continue, it would have served no real purpose. The available sanctions open to the court for such a technical breach would have been limited, as any breach had already occurred and there was no ongoing breach of the order. 

The judge at first instance was within their rights to suggest that the application could have a vindictive motive given the underlying proceedings. The judgment confirmed that the court is unlikely to make such serious orders where breaches are technical in nature, particularly where the punishment is outweighed by the overriding objective and where the court’s time and resources are required. 

Nicola Sharp C 09983

Nicola Sharp

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nicola.sharp@rahmanravelli.co.uk
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Nicola is known for her fraud, civil recovery and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.

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