Freezing Injunctions and the Insolvency (Amendment) Act 2020

The introduction of the Insolvency (Amendment) Act 2020 (“the Act”) creates a significant problem for creditors of insolvent or potentially insolvent companies. It is designed to protect companies and their directors during the pandemic and the post-recovery period. The Act prevents a creditor from enforcing a fixed or floating charge, issuing a statutory demand or applying to appoint a liquidator or an administrator during a moratorium period; even where the company was already insolvent before the pandemic or where it has become or it is likely to become insolvent, for reasons that are wholly unrelated to the pandemic or any Government measures introduced as consequence of it. The moratorium period will last from 16 March 2020 to 31 December 2020.

Freezing Injunction

The recent case of Gefion Insurance A/S v. Pukka Insure Limited (No 1 and No 2), illustrates why interim remedies, and freezing injunctions in particular, can assist creditors of potentially insolvent companies to protect assets from unjustified dissipation.

The dispute concerned a Danish insurance company (“the Claimant”) and its Gibraltar agent and coverholder Pukka Insure Limited (“the Defendant”). The Defendant was a member of wider group of companies which included a UK claims handling company called Action 365 (“the Claims Handler”). The Claimant, represented by Daniel Feetham QC, Rowan Pennington-Benton and Darren Martinez, succeeded in its application to the Supreme Court of Gibraltar for a freezing injunction order.

In brief, the Claimant and the Defendant entered into a Binding Authority Agreement (“the Binder”), under which the Defendant was authorised to bind the Claimant to contracts of motor insurance. The Binder entitled the Defendant to receive commissions from the Claimant, which were variable depending on the overall performance of the contracts of insurance placed through it. The Defendant would retain a provisional commission for the relevant year, from the commission payments made by customers based on a percentage of Gross Written Premium. The better the contracts performed, the more the Defendant would ultimately retain after any adjustment.

Since insurance claims could, in theory, be made at any time within a year after the final day for the purchase of insurance by a customer, the adjustment would take place at the end of 24 months from the commencement of the underwriting period. That adjustment would take into account how the ultimate loss ratio for the policies and the difference would be paid to the Claimant. For the year in question (2019-20) the Defendant had retained the sum of £7.812m in Provisional Commission and after the adjustment the Claimant was due between £2.996m and £4.947m. The Defendant argued that the Claimant had starved the Claims Handler of funds and that the cost of claims and therefore the loss ratio, was higher than what it would otherwise have been. It claimed that it was entitled to counterclaim in a sum in excess of £13m and that it therefore had defence by way of set-off.

The judge delivered two judgments and the central issue was whether payments that had been made by the Defendant to the Claims Handler (i.e. a company within the same group as the Defendant) in 2019 and 2020 amounted to “unjustified” dissipation of assets or whether these payments had been made in the ordinary course of business.

Unjustified Dissipation

The issue of “unjustified” dissipation was recently considered by the English Court of Appeal in Lakatamia Shipping Co v. Morimoto [2019] EWCA Civ 2203. The core question is whether an applicant can on a plausible evidential basis show a good arguable case that there is a risk of unjustified dissipation.

In Gefion Insurance A/S v. Pukka Insure Limited the Claimant argued that the financial information disclosed by the Defendant showed that it was either insolvent or likely to be insolvent post the 1 August 2019 and that there was a “good arguable case” that (a) the directors owed duties to the creditors of company (BAT Industries plc and others v. Sequana SA [2019] EWCA Civ) and b) any payments made post that date would to be set aside upon the future appointment of a liquidator. Consequently, the payments made to the Claim Handler were an unjustified dissipation. This was one of the arguments accepted by the judge in support of the granting of the Freezing Injunction.

The Insolvency (Amendment) Act 2020

The interplay between the Act and the case of Gefion Insurance A/S v. Pukka Insure Limited Insurance remains to be seen. The protection afforded to directors by virtue of the amendment of the Insolvency Act and the concept of “unjustified dissipation” remains a moot point. Nonetheless, a freezing injunction is undoubtedly one of the ways in which a creditor may wish to preserve the assets of an insolvent company during the moratorium period.

It is difficult to conceive of an example where the Act will provide directors with cover where they have acted fraudulently. However, the provisions might offer directors effective protection is in cases of marginal (rather than blatant) insolvent trading (i.e. wrongful trading in the UK). In such circumstances, a creditor’s ability to apply for a freezing injunction to protect the assets of a company from unjustified dissipation becomes all the more important. Indeed, it may be the only way in which creditors will be able to prevent directors from dissipating the assets of a company during the moratorium period.

Whilst parts of this article set out several features of the legal system and legal position in Gibraltar, it is not intended to comprise legal advice. For more information, please contact Daniel Feetham QC, Darren Martinez or Hannah Lopez.