The judgment of the Court of Appeal (Newey, Males and Snowden LLJ) in Hunt v Ubhi  EWCA Civ 417 demonstrates the importance of the adequacy of any undertaking in damages given in support of an application for a freezing order and underlines the need for full and frank disclosure. It arises out of an appeal against a decision by Mr Robin Vos, sitting as a Deputy High Court Judge, continuing a freezing order of Mellor J against the appellant, Mr Ravneet Ubhi, which had been granted on the application of Mr Stephen Hunt, as provisional liquidator of Black Capital, which was alleged to be an insolvent partnership.
A petition had been presented to wind up Black Capital by a Mr John Mitchell and others connected or related to him claiming to be creditors for some £18 million. The petition was presented pursuant to article 7 Insolvent Partnerships Order 1994 on the basis that Black Capital was a partnership between Mr Ubhi and a Mr Sarju Patel. At the same time without notice applications had been made to Mellor J for the appointment of a provisional liquidator and freezing orders. As a result, Mr Hunt was appointed as provisional liquidator, the petitioners having given a cross-undertaking in damages subject to a limit of £200,000; Mr Hunt then successfully applied for freezing orders against Mr Ubhi and Mr Patel for a maximum of £19 million. Mr Hunt gave an undertaking in damages in a restricted form, “limited to the amount of monies and the net realizable value of the unpledged assets of Black Capital (in provisional liquidation) taken into the custody or under the control of the Applicant in the course of the liquidation less the costs, expenses or other disbursements of the liquidation.” Bankruptcy petitions had also presented against Mr Ubhi and Mr Patel.
The winding-up and bankruptcy petitions came before Deputy Insolvency and Companies Court Judge Agnello KC along with an application by Mr Ubhi to set aside a statutory demand which had been served on him. She dismissed the petitions against Mr Ubhi and set aside the statutory demand. However, Mr Hunt remained provisional liquidator until the deputy ICC Judge had dealt with matters arising from her judgment.
It was against that background that the deputy judge (Mr Vos) had to consider whether the freezing orders made by Mellor J (in particular that against Mr Ubhi) should be continued. He decided they should be.
At a later hearing to deal with matters arising out of her judgment, Deputy ICC Judge Agnello stayed the dismissal of the winding-up petition against Black Capital and ordered that Mr Hunt’s appointment as provisional liquidator should continue pending an application for permission to appeal against her decision. Leech J granted permission to appeal and directed that, while the appeal was pending, the dismissal of the petition to wind up Black Capital should continue to be stayed and Mr Hunt’s appointment as provisional liquidator should continue.
On the hearing of Mr Ubhi’s appeal, the Court of Appeal analysed the decision in JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev on cross-undertakings and full and frank disclosure, referring to it as “nowadays the leading authority on the provision of cross-undertakings in damages,” and listing a number of points made by Lewison LJ, including (a) that the extent of the cross-undertaking in damages which an applicant for an interim injunction was required to give was a matter of discretion for the judge hearing the application; but (b) the default position was that a person applying for an interim injunction must give an unlimited cross-undertaking in damages, “that being the price for interfering with the defendant’s freedom before he has been found liable for anything.” Although Lewison LJ had acknowledged the possibility of exceptions to the general rule, in particular where the applicant was a public body or acting for others, Newey LJ expressed the view that the fact that “Mr Hunt was acting in the interests of all creditors, of whom the petitioners were a minority,” did not constitute a sufficient reason to depart from the default position. Among other things, he said, a problem with the approach taken by the deputy judge was “that it is not apparent that he appreciated quite how worthless Mr Hunt’s cross-undertaking is.”
He went on:
“In all the circumstances, I agree with [counsel for Mr Ubhi] that the Judge’s decision on the cross-undertaking issue is wrong in principle and cannot stand and that, exercising the discretion afresh ourselves, we should allow the appeal and set aside the freezing order as against Mr Ubhi. It seems to me that Mr Hunt has not shown any sufficient reason to depart from the ‘default position’ and, accordingly, that his cross-undertaking in damages is inadequate.
At the end of the hearing before us, [counsel for the respondent] said that, if we considered that the existing cross-undertaking is deficient, he would like an opportunity to consider whether something better could be offered. In my view, however, it is too late for that. When the Judge raised a similar point during the hearing before him, [counsel for the respondent] agreed that the injunction ‘will be granted with the cross-undertaking as it is or it will not be granted at all’. Moreover, Mr Hunt has not filed any respondent’s notice seeking to sustain the Judge’s order on an alternative basis.”
Newey J dealt with the issue of full and frank disclosure by reference to the principles summarised by Ralph Gibson LJ in Brink’s Mat Ltd v Elcombe. He found that what Mellor J had been told about the proposed cross-undertaking was not adequate and, in fact, was misleading:
“I do not think Mellor J necessarily had to be taken to Pugachev nor even that it was vital that the case be cited by name. If, however, Mellor J was not to be shown Pugachev, he needed to be told of the principles which emerge from it, including that the ‘default position’ is that a person applying for an interim injunction must give an unlimited cross-undertaking in damages, that the mere fact that litigation is being brought by a liquidator of an insolvent company does not compel the conclusion that the cross-undertaking should be capped, and that it can be relevant to consider whether one or more creditors could be expected to indemnify the applicant and whether the liquidator is being funded by a creditor. Counsel should also have commented on the application of those principles to the particular facts, drawing attention to matters bearing on whether the petitioners might be expected to stand behind Mr Hunt and to the fact that they were providing him with funding.”
He rejected other submissions relied on by the appellant in support of the disclosure point, which he ultimately dismissed as a reason for allowing the appeal.
The appeal succeeded, however, on the issue of the undertaking, and the freezing order against Mr Ubhi was set aside.
Whilst this case highlights the obstacles faced by office holders in the many estates where all the funds have been extracted, often by the Defendant Director, this was an unusual case in that there was no actual claim against Mr Ubhi aside the prospective call on him as a possible partner in Black Capital. Males LJ did say:
“I agree also that there was a failure to make a fair presentation of the correct legal position concerning the requirement for a cross-undertaking, but not in the other respects alleged, and that this failure does not in itself mean that the freezing order against Mr Ubhi should be discharged. In this regard I would draw attention to the fact that there are other ways in which such a failure may be marked where the interests of justice require that a freezing order be continued despite a failure of fair presentation, for example by a suitable order as to costs (see for example National Bank Trust v Yurov  EWHC 1913 (Comm) at  and  to )”. In any event, in the more usual case of a freezing order to back a direct claim against a director, an office holder will still need to bear in mind the need to conduct an exercise to ascertain potential damages in the (probably less than likely) event that the defendant is successful, and having explored the possibilities and evidenced them, persuade the judge to exercise his discretion in favour of a very limited undertaking. Where there is a significant or sole creditor such as HMRC, the court may well consider that they should provide an indemnity to back the undertaking in a reasonable sum, or perhaps consider procuring a bond to back it. Unfortunately that results in significantly more cost to the estate.