Putting assets out of reach of creditors: Marex Financial v Sevilleja Garcia

A recent case has confirmed that there is a strong argument that a person who causes a company to dissipate assets to the detriment of a judgment creditor thereby commits an actionable wrong which would entitle the judgment creditor to recover damages from that person.

A point of clarification: as the defendant in this action was based overseas, the English court first had to consider whether the claimant was entitled to serve on the defendant an English claim form. The court did not, therefore, decide the claim on its merits, but instead concluded that the claimant was entitled to serve proceedings, as it had a “good arguable case” as required by Practice Direction 6B of our Civil Procedure Rules.

Nevertheless, the court’s decision serves as comfort that, in the circumstances described below, a claimant has a prospect of recovering a debt from someone other than its debtor, where that person has effectively closed off the prospect of recovery from the debtor.

Facts

The claimant brought claims against two companies incorporated in the British Virgin Islands (BVI) and obtained judgment for around US$5 million. The defendant was the companies’ beneficial owner, who took steps following the release of the draft judgment to strip the companies of assets, leaving just over US$4,000. The court subsequently imposed a freezing order over the companies’ assets, but too late to prevent the asset-stripping.

The parties accepted the existence under English law of the “tort” (a wrongful act) of “intentionally causing loss by unlawful means”. The “unlawful means” alleged by the claimant were a breach by the defendant of the fiduciary duties that he owed to the BVI companies and a breach of BVI laws governing transfers of assets.

The defendant denied that his asset-stripping actions were “unlawful means” for these purposes. Accordingly, the claimant was not, he argued, entitled to recover damages from him. He had not, he submitted, interfered with the companies’ freedom to deal with the claimant (a requirement imposed by the House of Lords in an earlier case), but had merely reduced the assets available for such dealing.

The court disagreed: the point of the asset-stripping was to deny the companies’ freedom to deal.

Other avenues of redress

The claimant would not, applying the principle of “reflective loss”, have been entitled to claim loss that merely “reflected” the loss suffered by the companies as a result of the defendant’s asset-stripping actions. The proper claimants for such loss would be the companies themselves. An analogy may be drawn with the loss in share value suffered by a shareholder, where the company’s management has misappropriated company funds. In this case, the shareholder’s usual remedy would be to claim unfair prejudice under the Companies Act 2006, section 994.

Had the “freezing order” been in place before the asset-stripping, of course, the companies and any third party aware of such order and acting in breach of it, would have been accountable for contempt of court.

Why does this matter to me?

If you cannot rely on the existence of a freezing order, and given that you are unable to recover from the miscreant for reflective loss, it is perhaps reassuring to know that a person who directs your debtor to put its assets out of your reach may be held to account for the loss that you suffer as a result.

In circumstances similar to those described in Marex Financial, there are of course alternative remedies under the Insolvency Act. However, it may be difficult to establish that the technical requirements of this legislation have been met and, in many cases, remedies depend on the debtor company being in administration or liquidation. Further, in an insolvency situation, the aim of the insolvency practitioner is to restore the company’s assets for the benefit of creditors generally, rather than to recover funds and apply these direct in meeting claims of individual creditors.