The High Court has continued an ex parte injunction, which removed a director and appointed two new directors to the board instead.
This ‘exceptional relief’ was ordered first on 9 October 2023, in light of allegations of breaches of the UK’s sanctions regulations against Russia. The removal of Mr Crisp (the former director) was said to be the only way to mitigate the threat to the reputational damage of the companies.
Continuation of the injunction was granted after a hearing in May 2024 (judgment handed down on 5 July 2024) as the successful new management had created a new ‘status quo’ in the seven months since they were appointed.
Brief Background Facts
Mr Crisp was the director of a number of companies that were in the business of selling luxury perfume. Mr Garofalo and Mr Crisp had a Relationship Agreement that allowed Mr Crisp free rein to work in the businesses without undue interference. Mr Garofalo was an investor and shareholder in the business.
In March 2022, Mr Garofalo and Mr Crisp agreed that the perfume companies would cease supplying their products to Russia, following Russia’s invasion of Ukraine on 24 February 2022.
Under The Russia (Sanctions) (EU Exit) Regulations 2019 (the Regulations), there is a prohibition on the trade of luxury goods, which includes perfumes with a sales price that exceeds £250 per 6.25 litres. The companies’ products were sold into Russia at substantially more than this sale price.
The Court found that there was a strong prima facie case that Mr Crisp had knowingly caused the companies to breach the Regulations, and continue to sell their perfume products in Russia.
Mr Crisp accepted that there had been a breach of Regulations, but says it was an innocent mistake.
Mr Garofalo was advised by a crisis communication officer to take swift action to remove Mr Crisp from the organisation and that any other course of action would be likely to be terminal for the business.
Mr Crisp’s Lack of Legal Advice
Mr Crisp failed to take legal advice about the companies’ dealings with Russia. He could have consulted the in-house lawyer, and the court said he would have been “expected to do so rather than rely on his own research.” Equally, he could have consulted with the outside solicitors for the companies, but he did not do so.
This was one of the reasons why it was difficult to accept that Mr Crisp had made an innocent mistake. Mr Justice Freedman said “When the importance of acceding to sanctions legislation was abundantly apparent, it is difficult to give any credence to the suggestion of Mr Crisp was making an innocent mistake.”
A Higher Threshold for Exceptional Relief
The allegations remain to be proven at a trial or final hearing of the petition, but at this stage, the court said that it had a high degree of assurance that they will be made out at a trial or final hearing.
Mr Justice Freedman applied a higher threshold than a serious issue to be tried. He applied the high degree of assurance test - that Mr Garofalo will succeed at trial.
He held that the evidence before him provided a high degree of assurance that Mr Crisp’s conduct was in breach of the Relationship Agreement, his fiduciary and statutory duties as a director, and the agreement with Mr Garofalo not to trade with Russia.
Balance of Convenience
On the balance of convenience, the judge found that the greater risk of injustice would be to Mr Garofalo in the event that there is no injunction or if the current injunction is discharged.
The reason for this was the “existential danger to the companies” if Mr Crisp were to be reinstated to management despite the strong prima facie case that he was deliberately trading or causing the companies to trade in breach of sanctions.
Seriousness of Breaching Sanctions
Mr Justice Freedman said that a deliberate breach of sanctions is so serious that it requires such an unusual order.
The judge highlighted that a breach of sanctions has a maximum sentence of 10 years’ imprisonment. It steals a major advantage over competitors, who have to suffer as a result of a lucrative market being closed to them, only to watch the competitor business from continuing to benefit from the market.
Key Takeaways
The Judgment serves as a significant precedent, emphasising the English courts' readiness to intervene in company management to uphold sanctions compliance. This ruling highlights the critical importance for directors and officers to diligently adhere to sanctions regimes.
The court's decision to maintain an ex parte injunction removing Mr. Crisp underscores the severe consequences of sanctions breaches, including personal liability and the potential for abrupt shifts in corporate governance.
It’s a reminder to ensure companies have comprehensive compliance measures in place and to follow them. Directors should take legal advice on compliance with sanctions. It is imperative to mitigate risks and it safeguards a company’s interest effectively.
