Wednesday, 1 August 2012

British Court Imposes Duty on Directors of Corporate Contemners to Ensure Freezing Orders are Obeyed

The British courts, which first developed the Mareva injunction remedy, continue to demonstrate their leadership of the common law world in the area of  freezing injunctions.    The High Court of Justice, Queen’s Bench Division, Commercial Court has recently ruled, in Templeton Insurance v. Motorcare Warranties,  that corporate directors who are aware of a freezing order against their company have a duty to take reasonable steps to ensure the order is obeyed, and wilful failure to take such steps is punishable as contempt.  That the director did not know his/her actions constitute a breach of the order is not a defence.   

Here are the facts of the case.  Motorcare sold insurance as an agent for Templeton. Templeton sued Motorcare after  Templeton came to believe Motorcare was providing false financial information. The trial court issued the following injunction:  Motorcare was not to “remove from England and Wales or in any way dispose of, deal with, or diminish the value of,  other than by payment to [Templeton] any of its assets in England and Wales”.  This particular order was issued only against Motorcare, not its directors.  The order also stated “It is a contempt of court for any person notified of this order knowingly to assist in or permit a breach of this order. Any person doing so may be sent to prison, fined or have his assets seized”.   The directors knew of the injunction. Shortly after the trial, Motorcare went into liquidation, and transferred to a successor company called Motorcare Elite all of the Motorcare business, including the network of sales agents, office premises, staff, website, business name, goodwill and so on.  The directors of Motorcare were shareholders in Motorcare Elite.  Templeton then sought an order for committal of the directors for contempt. 

Because the directors were not personally bound by the order,  to prove contempt (criminal, not civil contempt), under  British law one must show the accused’s act constitutes a “wilful interference with the administration of justice”.  Templeton argued that because the accused were directors of the company, there was no need to prove they knowingly breached the order.  The directors claimed not to know that the transfer from Motorcare to Motorcare Elite constituted a breach of the order, and  argued that they cannot be found guilty without proof they knowingly breached the order.  The Court rejected Templeton’s argument as too broad, and the directors’ argument as too narrow. The court held instead that directors who are aware of a freezing order against the company (or undertaking) have a “duty to take reasonable steps to ensure the order is obeyed, and wilful failure to take such steps is punishable as contempt”.  Such failure is wilful unless the directors had a reasonable belief that other officers or directors would take such steps.  The Court found the directors guilty of contempt; the court did not decide the penalty at that hearing but made clear it would consider incarceration.

While Mareva injunctions directed against third parties -- e.g. orders compelling a defendant’s bank to freeze its accounts -- are a potent weapon, the effectiveness of Mareva injunctions directed against a corporate defendant depends largely on whether the risk of a contempt proceeding would influence the officers and directors.  If the officers and directors can take the assets out of the defendant with impunity, the Mareva injunction will be of little practical value. The ruling in Templeton reflects the view that Mareva injunctions are an important part of modern litigation and thus the law should ensure they have practical value.

Under the rules of court in some provinces including Ontario and Manitoba, where a corporation has been found in contempt, a judge may impose sanctions also on an officer or director of the corporation  (For Ontario, see rule 60.11(6) of the Rules of Civil Procedure).  To prove contempt it must be established that the accused  deliberately or wilfully or knowingly did some act which was designed to result in the breach of a court order.  The law in Ontario does not presently impose the same duty imposed in Templeton.     However, Canadian courts have followed Britain’s lead on many aspects of pre-trial remedies, and should consider following Templeton too.