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The facts

Paul Crowther (“H”) and Caroline Crowther (“W”) married in 1996. They ran a shipping business together (“the business”), which operated vessels providing services in the construction of offshore wind farms and oil and gas subsea operations. This enabled them to enjoy an affluent lifestyle: they lived in a house valued in excess of £4.5 million, their three children were privately educated, they had horses and employed a groom, they owned a collection of expensive cars, and they had an interest in a private aeroplane. However, in September 2019, they each issued a petition for divorce, and financial remedy proceedings were subsequently commenced.

Until November 2012, the vessels in the business were owned by subsidiaries of a company called Med Marine Charters Ltd, but a limited partnership called Atlantic Marine & Aviation LLP (“AMA”) dealt with the operation and management of the vessels. This changed when, in 2012 (at a time when the business was highly leveraged and the parties were struggling to finance their debts) H and W were introduced to Steven Knight. Mr Knight was a UK qualified chartered accountant who specialised in international tax planning and asset management. He had his own business, the Castle Trust Group, in Gibraltar.

After various discussions between the parties and Mr Knight over the summer of 2012 (when according to Mr Knight, loan note holders were making clear that they wanted to get their money back from the parties), two arrangements were agreed in November 2012. The first was an agreement whereby a newly formed Castle entity, Castle Ship Management Ltd (“CSM”) would take over the business’ indebtedness under the loan notes, together with the (legal and beneficial) ownership of five vessels and the companies which owned them, and the vessels would then be bareboat chartered back to AMA on terms that hire would be payable when the vessels were earning hire on sub-charter. The second arrangement was a Family Settlement which it was contemplated would protect W and the parties’ children in the event of H’s early death.

Shortly after the parties’ respective petitions had been issued, CSM gave notice of termination of the bareboat charter to AMA with immediate effect. However, on the same day CSM concluded a new bareboat charter with Atlantic Marine Offshore & Subsea Services Ltd (“AMOSS”), a new company established by H. Although this charter was also terminated, at the time of the appeal H was still working with Mr Knight, having been appointed as technical manager of the vessels.

Procedural history

In the course of the financial remedy proceedings, W obtained a freezing order from Lieven J in December 2019 to restrain the second to sixth respondents (Mr Knight and companies controlled by him) from disposing of or charging four vessels operated by him within the parties’ shipping business. A freezing order in similar terms was also made against H.

It was common ground that the legal title to the vessels was held by companies controlled by Mr Knight, but W’s case was that she and H were entitled to the beneficial interest in those vessels (or in the shares in the companies which owned the vessels). W claimed there was a fraudulent conspiracy between H and Mr Knight to claim that neither of the parties had any interest in the vessels, and thus to reduce the value of the assets available for distribution in the financial remedy proceedings.

This was denied by Mr Knight, supported by H, who claimed that his companies were not only legal but also beneficial owners of the vessels, and that there was an urgent need to sell or charge one in order to generate funds for the upkeep and running costs of the rest of the fleet.

At a hearing in March 2020, Holman J discharged the freezing order made by Lieven J against the second to sixth respondents, leaving them free to dispose of the vessels. However, there was no challenge to the freezing order also made against H preventing him from doing so, which remained in place. W then sought to continue the injunction granted by Lieven J until the issue as to the beneficial ownership of the vessels could be determined. The freezing order against the second to sixth respondents was reinstated by Floyd LJ pending the appeal.

Appeal against the decision of Holman J

W submitted that the hearing before Holman J was unfair and that he was wrong to discharge the injunction against the second to sixth respondents. The Court of Appeal, with Males LJ giving the judgment, were of the opinion that the hearing before Holman J was unsatisfactory and that his decision was flawed. This was because (due to time pressure) he had had no proper opportunity to read any of the evidence served by the parties. He never saw the material on which W relied in support of her case that the 2012 arrangements constituted a sham, and did not even reach a provisional view as to whether she had established a good arguable case. Since he apparently did not regard the possibility of making an order to the effect that, if Mr Knight sold a ship(s), the proceeds would be reinvested to meet various expenditure commitments as open to him, Males LJ considered that Holman J’s exercise of discretion could not stand.

Determination of the Court of Appeal

Males LJ decided that the Court of Appeal should determine for themselves whether there should be a freezing order against the second to sixth respondents, and if so, on what terms. There was ‘no doubt that in the circumstances of the present case we should consider the position for ourselves’ [43]. The current position was ‘extremely urgent’ because Prohibition Notices had been served on three vessels in Tilbury by the Maritime & Coastguard Agency, which, if nothing was done, was likely to lead to their arrest and forced sale, probably for scrap, in the very near future [43]. He considered that ‘we are in a position to determine this issue fairly’, because unlike Holman J, ‘we have read the evidence and are able to form the necessary views at this interlocutory stage’ [44].

The law on freezing orders

Males LJ set out a digest of the law on freezing orders:

     i. s37(2) of the Matrimonial Cause Act 1973 provides that:

Where proceedings for financial relief are brought by one person against another, the court may, on the application of the first-mentioned person –

(a)   if it is satisfied that the other party to the proceedings is, with the intention of defeating the claim for financial relief, about to make any disposition or to transfer out of the jurisdiction or otherwise deal with any property, make such order as it thinks fit for restraining the other party from so doing or otherwise for protecting the claim…

     ii. In Lakatamia Shipping Company Limited v Morimoto [2019] EWCA Civ 2203, Haddon-Cave LJ quoted ‘the succinct summary of the test’ by Peter Gibson LJ in Thane Investments Ltd v Tomlinson (No 1) [2003] EWCA Civ 1272 at [21], where he said that the court must be satisfied before making a freezing order that:

…the applicant for the order has a good, arguable case, that there is a real risk that judgment would go unsatisfied by reason of the disposal by the defendant of his assets, unless he is restrained by the court from disposing of them, and that it would be just and convenient in all the circumstances to grant the freezing order.

      iii. In the same judgment, Haddon-Cave LJ also quoted Popplewell J’s summary of the key principles applicable to the question of risk of dissipation, as set out in Fundo Soberano de Angola v dos Santos [2018] EWHC 2199 (Comm). In summary, those principles are:

a. The claimant must show a real risk, judged objectively, that a future judgment would not be met because of an unjustified dissipation of assets.

b. Dissipation means putting the assets out of reach of a judgment, whether by concealment or transfer.

c. The risk of dissipation must be established by solid evidence; mere inference or generalised assertion is not sufficient.

d. The risk of dissipation must be established separately against each respondent.

e. It is not enough to establish a sufficient risk of dissipation merely to establish a good arguable case that the defendant has been guilty of dishonesty; it is necessary to scrutinise the evidence to see whether the dishonesty in question points to the conclusion that assets may be (NB. changed from ‘are likely to be’ by Haddon-Cave LJ) dissipated.

f. It is necessary to take account of whether there appear at the interlocutory stage to be properly arguable answers to the allegations of dishonesty.

g. A respondent’s former use of offshore structures is relevant but does not itself equate to a risk of dissipation, since such structures are often used for legitimate reasons such as tax planning and privacy.

h. It is unjustified dissipation that must be threatened. The purpose of a freezing order is not to provide the claimant with security, but to restrain a defendant from evading justice by disposing of, or concealing, assets otherwise than in the normal course of business in a way which will have the effect of making it judgment proof.

i.  A freezing order is not intended to stop a corporate defendant from dealing with its assets in the normal course of its business, nor to constrain an individual defendant from conducting their personal affairs in the way they have always conducted them. If the defendant is not threatening to change the existing way of handling their assets, it will not be sufficient to show that such continued conduct would prejudice the claimant’s ability to enforce a judgment.

j.  Each case is fact specific and relevant factors must be looked at cumulatively.

              iv. Males LJ also cited his judgment in Vneshprombank LLC v Bedzhamov [2019] EWCA Civ 1992, where he said at [57]: ‘[w]hile the disposal of assets outside of the ordinary course of business is prohibited as being contrary to the interests of justice, payments in the ordinary course of business are permitted even if the consequence will be that the defendant’s assets are completely depleted before the claimant is able to obtain its judgment’.

Was there a good arguable case?

Males LJ was satisfied that W had a good arguable case that the 2012 arrangements were a sham. There were 11 reasons for this:

1. There was reason to be sceptical about Mr Knight’s evidence that the parties’ creditors were pressing for repayment and threatening to take over the vessels. Demand letters sent by CSM, purportedly acting on behalf of creditors, appeared to have been carefully orchestrated between H and Mr Knight, and the parties’ largest creditor did not say the parties were in default or that Castle was acting to obtain payment.  

 2. The economics of the arrangement did not make sense. A page taken from CSM’s accounts for the year ending 31 December 2013 appeared to show that the total value of the loan notes taken over by CSM as of that date was £346,980, which was the figure stated in a supposed attachment to the 2012 agreement as being the outstanding debt on loan notes in 2012, more than a year before. The attachment included items which were not explained, and had the appearance of an attempt to manufacture liabilities showing the parties in a worse position than was really the case.

3. The 2012 agreement provided that AMA would nominate CSM as the buyer for the purchase of a yacht called CD One. However, an AMA bank statement suggested that it was AMA and not CSM which purchased and paid for the yacht.

4. There was some support for W’s case that the true nature of the arrangement was that Mr Knight would be paid a fee for setting up and managing the new structure, none of which appeared in the agreement.

5. An email sent from an AMA employee asking if W wanted him to ‘get another £100k over to Castle’ and ‘build up that house fund’ appeared to support W’s case that the purpose of the Family Settlement arrangement was to transfer funds offshore. It also appeared to contradict Mr Knight’s evidence that no money was ever paid into the Family Trust.

6. W had made a request to the trustees of the Mediterranean Sports, Art and Educational Foundation ‘to consider a grant to purchase a horse box’ for one of the parties’ children, who had been offered an equestrian scholarship. That seemed hard to reconcile with Mr Knight’s evidence that when monies were advanced to fund the parties’ lifestyle, it was done by way of loan.

7. It was odd that one of the vessels, Atlantic Discovery, had been purchased by CSM for only £320,000 in June 2018 but two months later was purchased by the parties’ company for £2.95 million. Contemporaneous emails showed H was advised by his accountant that he needed to reinvest a total sum of £3,192,276 to obtain rollover relief on the sale of a serviced office centre to avoid a substantial tax bill. This gave rise to a suspicion that £2.95 million was a fictional purchase price. The bill of sale included a receipt for the price, but Mr Knight claimed the price was never paid, such that he could take back ownership of the vessel.

8. It seemed odd that the Mediterranean Sports, Art and Educational Foundation should have paid school fees for another of the parties’ children in January 2018. It was puzzling that Mr Knight’s entity was prepared to make such ‘charitable’ donations at a time when Mr Knight now says he was owed a substantial amount by the parties.

9. An email from February 2019 said that ‘[t]he business has NO debt’. This was impossible to reconcile with Mr Knight’s claim that a substantial debt was owed to CSM.

10. Mr Knight’s evidence was that CSM was owed £5 million by the parties or their companies, but there was no evidence of any payment being demanded by CSM before the breakdown of the parties’ marriage in September 2019. Males LJ found that ‘inexplicable’ if £5m or anything like that was really thought to be due [66]. It was odd that Mr Knight was so willing to continue to work with H and that they remained on what Holman J called ‘obviously friendly terms’ given that he claimed that H owed him a substantial sum of money which he had little prospect of recovering [67].

11. No documents in support of Mr Knight’s claim that he made a loan to the parties secured by an unregistered charge on the family home had been produced.

There was therefore ‘at least scope to question whether the substantial liability of the Crowthers and their business to Mr Knight had been exaggerated or even invited’, and there was no doubt that W met the standard of demonstrating a good arguable case on the merits of her claim [70].

Risk of dissipation

Males LJ said that in the circumstances, ‘the risk that assets will be put beyond reach of any judgment speaks for itself’. He added that there was ‘a sufficient risk that assets may be dissipated to justify the grant of a freezing order’ [71].

Lack of candour

It was submitted on behalf of H that there had been a lack of candour on the part of W in making the application for a freezing order to Lieven J. Males LJ was not prepared to consider that submission because if such an argument were to be run ‘it is essential that there is a clear statement identifying precisely the matters allegedly not drawn to a judge’s attention on a without notice application’ [72].

Ordinary course of business

Males LJ considered that ‘[a] freezing order ought not in principle to prevent a defendant from selling one asset in order to invest in the remaining assets used in his business’ [76]. He noted that that was what Mr Knight said he wished to do, and he also noted the urgency of the situation. The Court of Appeal therefore canvassed with the parties ‘the possibility of an order which would enable a vessel to be sold or charged as security for a loan and for the proceeds to be used only for the purpose of paying such running costs together with repairs and maintenance’ [76]. Mr Knight was prepared to offer an undertaking to that effect, and W was prepared to contemplate such an order as a last resort, provided various safeguards were included.

Conclusion

Males LJ concluded that an order to that effect was the ‘just and convenient course’ [77]. It provided ‘a prospect that the value of the vessels may be preserved for whomever is held to be their ultimate beneficial owner in circumstances where, if nothing is done, there is a very real risk that they will shortly be sold on a forced sale for no more than scrap value’ [77]. That would not be in W’s interests if she was able to make good her case; but conversely, if she was unable to do so, she would potentially be exposed on her undertaking in damages to a significant liability which she would be unlikely to be able to meet.

Consequently, W’s appeal was allowed and the freezing order was continued, but on terms which would enable one of the vessels to be sold (or vessels to be charged as security for a loan up to the value of the most valuable vessel) and the proceeds to be used to pay running costs and to carry out any necessary repairs or maintenance work.

Henrietta Boyle, Pupil at 1 Hare Court

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