Out-Law News | 28 Feb 2013 | 10:08 am | 2 min. read
The UK's highest court ruled that the Financial Services Authority (FSA) did not need to provide a guarantee that it would cover any such losses when it froze bank accounts (19-page / 83KB PDF) belonging to a gold mining company accused of fraud. Barclays, the bank where the accounts were held, had argued that the FSA should provide 'cross-undertakings' to cover all damages claims against the bank as a result of the enforcement action.
The FSA obtained a freezing injunction against Sinaloa Gold and PH Capital Invest in 2010, while it was investigating the companies over the sale of worthless shares in Sinaloa as part of a 'boiler room' scam. Under Schedule B, it gave an inadvertent guarantee, or 'undertaking' to cover both costs and losses incurred by third parties as a result of the injunction. When it realised its mistake the FSA applied to have this removed, an application which was opposed by Barclays as the bank where Sinaloa held six bank accounts.
Although the High Court refused the application, its decision was overturned by the Court of Appeal. The Court of Appeal decision meant that the FSA was not liable to cover any costs incurred by third parties as a result of complying with the injunction, but not any losses.
The Supreme Court agreed with the Court of Appeal's reasoning, pointing out that there was a difference between injunctions obtained in private actions and those which arose in the context of law enforcement activity. In a private claim, the person or company should be "prepared to back its own interest with its own assets" in case it obtained the injunction "unjustifiably" and caused harm to a third party, Lord Mance said in his leading judgment. Cases where a public authority was "seeking to enforce the law in the interests of the public generally" were different, he said.
"Ultimately, there is a choice," he said. "Either the risk that public authorities might be deterred or burdened in the pursuit of claims in the public interest is accepted as a material consideration, or authorities acting in the public interest must be expected generally to back their legal actions with the public funds with which they are entrusted to undertake their functions."
"[Previous case law] stands at least for the proposition that public authority claims brought in the public interest require separate consideration ... It indicates that no cross-undertaking should be exacted as a matter of course, or without considering what is fair in the particular circumstances of the particular case," he said.
Turning to the facts of the freezing injunction granted against Sinaloa, Lord Mance said that there were no "special circumstances" which would require the FSA to guarantee third party losses despite the general rule. The case was one of "a public authority seeking to enforce the law by the only means available under the governing statute", he said.
Litigation expert Laura Gillespie of Pinsent Masons, the law firm behind Out-Law.com, said that the Supreme Court's decision was clear and unequivocal. However, she pointed out that banks and other third parties were often at a disadvantage when complying with freezing injunctions.
"The Supreme Court has clearly stated public authorities should be able to enforce the law without being inhibited by fear of cross claims and the exposure of their resources where they are fulfilling their public and often statutory duty," she said. "Whilst this will be good news for the enforcement authorities, it is likely to be of little comfort to banks or other third parties who are faced with the often difficult task of complying with such orders with no redress for any resultant losses."