British Virgin Islands: cross-undertaking in damages required as price of continuing interim receivership order
21 June 2022
A defendant owns a British Virgin Islands company, which controls a majority stake in a publicly listed Japanese company. A claimant obtains an ex parte interim freezing order and gives the usual cross-undertaking in damages to comply with any order the Court may make, if the Court later finds that the order has caused loss to the defendant or his company and decides that they should be compensated for that loss. When applying to continue the freezing order on an inter partes basis, the claimant also seeks the appointment of receivers to the BVI company to police compliance with the freezing order. The receivership application is not pressed at the return date but is later renewed and receivers are appointed.
Should the claimant be required to pay compensation, if the Court thinks appropriate, for losses caused by the receivers’ appointment, as distinct from losses caused by the freezing order?
Intuitively, it seems that the answer should be yes. But for the litigation, the defendant would not have been deprived of control of his BVI company. Should the claim fail, it seems right that the defendant, his company and any injured third parties should be compensated for any losses caused by the wrongful deprivation.
The claimant in JTrust Asia Pte Ltd v Konoshita, however, argued that the answer should be no. Notably, the first time that the claimant ever denied the applicability of its cross-undertaking to losses caused by the receivers’ appointment was immediately after the receivers had been granted sanction (on the claimant’s application) to replace the Japanese public company’s board en masse. The evidence of those board members was that the replacement would destroy the Japanese company’s underlying business and cause massive losses to its shareholders, including to the BVI company to which the receivers had been appointed. The claimant therefore had an incentive to avoid any potential liability for the losses asserted.
Earlier in the litigation, the defendant had applied for orders requiring the claimant to fortify its cross-undertaking by paying security into court, expressly on the basis that the cross-undertaking extended to losses caused by the receivers’ appointment. In response, the claimant never suggested that fortification was unnecessary on the basis that losses caused by the receivers’ appointment would fall outside the scope of its cross-undertaking. Instead, the parties had proceeded on the basis that such losses would be caught. The claimant’s new position therefore had the appearance of a volte-face, arrived at only when the potential consequences of the receivership order risked materialising.
The primary Judge in the Commercial Division of the BVI High Court and the Judges on appeal to the Court of Appeal for the Eastern Caribbean all rejected the claimant’s position and found in favour of the defendant. However, they did so on different grounds.
Grounds for decision
The primary Judge held that the receivership order operated as a form of injunction, that the receivership order was ancillary to the freezing order and that the claimant’s cross-undertaking (which the parties agreed had been given in connection with the freezing order) should be implied in the receivership order. The claimant appealed.
The Court of Appeal agreed with the primary Judge that the receivership order in this case operated as a form of injunction, because of the way in which it interfered with the defendant’s control of his BVI company. However, the Court emphasised that this will not necessarily be so in every case. It is the consequences of the receivers’ appointment, rather than the appointment itself, that triggers the need for the claimant to offer a cross-undertaking in damages. Each case must be decided on its own facts.
The Court of Appeal also agreed with the primary Judge that the receivership order in this case was ancillary to the freezing order, as its express purpose was to provide support to the freezing order by having the receivers police compliance with the freezing order. That the receivership order was made later in time than the freezing order did not affect this analysis.
Where the Court of Appeal differed from the primary Judge was in holding that the claimant’s cross-undertaking could not be implied in the receivership order. An undertaking is a voluntary promise given by a litigant to the Court, breach of which exposes the litigant to the Court’s contempt jurisdiction. The Court has no power to force the undertaking to be given or to vary its terms. If an applicant for a freezing order or for another interim injunction fails to give a cross-undertaking, whether expressly or by implication, then all the Court can do is to refuse to make the order sought. On the facts of this case, the Court of Appeal held that the claimant had not given any undertaking in connection with the receivership order.
However, that was not the end of the matter. The defendant had filed a counter-notice in the claimant’s appeal, seeking to uphold the primary Judge’s decision on other grounds or to have the Court of Appeal make other orders that would lead to the same practical outcome.
On one of these grounds, the Court of Appeal made no findings. The defendant had argued that, as a matter of construction of the claimant’s cross-undertaking, any losses caused by the receivers’ appointment would constitute losses caused by the freezing order to which the receivership order was ancillary. The Court described this as an interesting point of law but decided the appeal on another ground.
Had the appeal not been decided on that other ground, this interesting point might in due course have been put to the test, upon the defendant applying to activate the claimant’s cross-undertaking by seeking orders for an inquiry into damages. In those circumstances, the Court may have had to rule on whether the losses claimed were, on the proper construction of the cross-undertaking, caused by the freezing order and whether the defendant should be compensated for them.
The ground on which the appeal was disposed was the final ground in the defendant’s counter-notice. The defendant argued that, because of the sanction granted to the receivers to replace the Japanese public company’s board and the damage that this risked causing, the receivership should not be continued unless the claimant gave the cross-undertaking which (on the Court of Appeal’s findings) had not been given previously. The Court held that, in the exercise of its discretion, such a cross-undertaking should now be required as the price of the receivership continuing. It therefore ordered that, unless the claimant filed a cross-undertaking to compensate the defendant, his BVI company or the Japanese company should the Court so order, the receivers would be discharged from office. The claimant then filed the required undertaking.
Implications of the judgment
Whether the defendant, his BVI company or the Japanese company ever apply to activate the claimant’s new cross-undertaking may not be known until the conclusion of litigation that remains on foot in various theatres. Nevertheless, one further point of construction has already been foreshadowed by the claimant at the hearing of the appeal. The claimant argued that no substantial losses could ever be caused by the receivers in their capacity as receivers of the shares in the defendant’s BVI company because, instead, such losses could only be caused by the receivers in their separate capacity as directors of the BVI company, to whose board they had appointed themselves by voting the shares under their control. This meant, on the claimant’s analysis, that any such losses could not be caused by the receivership order for the purposes of the claimant’s cross-undertaking. Whether such losses might alternatively be said to be caused by the receivers in their further capacity as receivers of the BVI company’s assets, including its shareholding interest in the Japanese company, was not explored.
This argument raises a potentially important point of construction when it comes to drafting interim receivership orders and cross-undertakings. Receivers who are appointed over a defendant’s shares in a BVI company will typically be insolvency practitioners who carry sufficient professional indemnity insurance coverage to compensate the company for any losses that may be caused by their negligence as its directors. The carrying of such insurance is generally a prerequisite to the Court dispensing with orders for the receivers to provide security for their appointment. However, losses can be caused even without negligence, for instance because the defendant is simply better placed than any outsiders to protect the company’s assets. Losses can also be caused to third parties, in circumstances that do not give rise to any actionable claim against the receivers in any capacity, but for which a compensation order would be made if they had instead been caused by a freezing order for which the usual cross-undertaking had been given. Defendants in this position will need to be astute to ensure that the cross-undertaking required of the claimant is worded so that there is no doubt that it extends to losses which may be caused by the receivers qua directors of the company, including losses caused to third parties, and which may not be covered by any professional indemnity insurance policy.
Additionally, the sanction order in this case included provisions releasing the receivers from any liability, should the replacement of the Japanese company’s board have the effect asserted by those board members, so that the claimant’s indemnity to the receivers could not be called upon. Absent a cross-undertaking that exposed the claimant to potential liability for losses caused by the receivers acting pursuant to the sanction which the claimant had obtained for them, the defendant and his BVI company could have lost enormous sums because of the claimant’s actions and yet have had no recourse against anyone.
One can understand the reluctance of a claimant to take on potential exposure to losses that may be caused by interim receivers appointed on its application – in respect of which losses a fortification order might be made – in addition to liability for the costs of its own lawyers and (should the claim fail) of the receivers, the receivers’ lawyers and the defendant’s lawyers. That may be especially so where the receivers come to acquire their own independent views as how the receivership ought to be conducted, with which views the claimant may disagree. It is always open to the claimant to apply to discharge a receivership where it no longer wishes to incur that exposure, but the result will almost inevitably be the activation of its cross-undertaking with respect to losses already suffered up to that point. At least in cases where the receivership operates as a form of injunction, a cross-undertaking in damages exposing the claimant to that liability is the price of the appointment.
Forbes Hare acted for the defendant.