From Across the Pond – Dissipation of Assets May be Tort Under English Law: Marex Financial Limited v. Garcia  EWHC918
October 23, 2017
Authored by: Robert Dougans and Tatyana Talyanskaya
Editor’s Note from The Bankruptcy Cave: Our good colleagues Robert Dougans and Tatyana Talyanskaya from BC’s London office published this earlier in the summer, and we could not wait to add it to your autumn reading list. The lesson here is powerful – England, the birthplace of the common law, comes through again to right an injustice where traditional legal principles might otherwise fall short. Many of you readers have often dealt with defendants playing a shell game with their assets. The Marex decision provides a powerful response – an independent tort against the individuals who perpetrated the asset stripping, instead of a pursuing a daisy-chain of subsidiaries and affiliates, all bereft of assets. We at The Bankruptcy Cave applaud this decision – for every right, there shall be a remedy!
There is a joke that freezing injunctions are dangerous to heath. They appear to be carcinogenic, as people subject to them often tell the Court they are too ill to engage with proceedings. (Observation of such defendants may provide heartwarming evidence for miracle cures.) They also appear to cause amnesia, as defendants somehow forget to disclose the existence of very substantial assets.
In a similar way adverse judgments can be a boon for corporate finance professionals. A large judgment against a corporate defendant may well provoke a flurry of M&A activity as the unsuccessful corporate defendant’s asset are rapidly re-allocated to other group companies, or to the defendant’s beneficial owner
The background to the decision of Mr. Justice Knowles in Marex Financial Ltd v Garcia  EWHC 918 (Comm) dealt with a familiar situation. A claimant obtains a judgment against the company which (according to pre-litigation due diligence) has substantial assets. When enforcement proceedings begin the claimant learns that the management/owners of the defendant company have immediately emptied the cupboard as soon as judgment was obtained, leaving them with a worthless decision.
What can be done? Insolvency law may provide remedies but a claimant is then in the hands to some extent of insolvency practitioners, and clawing back assets from some jurisdictions may be difficult in practice. Mr. Justice Knowles’ decision suggests a claimant should explore making the persons responsible for the asset-stripping liable in tort.
The Marex case involved the claimant, a foreign exchange broker, obtaining judgment for $5m against two BVI companies (the “Companies”) owned by Mr. Sevilleja. As soon as the draft judgment was circulated, Mr. Sevilleja embarks upon a thorough asset-stripping of the Companies, transferring over $9m from the Companies to himself. When they commenced enforcement proceedings Marex found that the Companies’ position had deteriorated and they had just over $4,500 between them. Marex brought proceedings against Mr. Sevilleja, saying he had induced/caused the Companies to dissipate assets to frustrate the earlier judgment. Marex relied upon the following causes of action.
- knowingly inducing and procuring the Company’s to act in wrongful violation of the Claimants rights under the judgments;
- committing the tort of intentionally causing loss by unlawful means; and/or unlawful interference with the Claimants economic interests (some of the so-called “economic torts”).
The defendant argued that no tort of unlawful violation of rights under a judgment existed. He accepted that the relevant “economic torts” did exist (they are well-established under English law), but argued that they did not cover frustrating the enforcement of a judgment in this way.
Mr. Justice Knowles found for the claimant on both points: He recognised the existence of a tort violation of rights under a judgment, and also recognised that doing so could count as an economic tort.
Of particular note is that the reasoning for his judgment was based on the well-known proposition that an award of damages by a court of competent jurisdiction (even a foreign court with whom there is no enforcement convention) is recognised in England as a debt which can be enforced at common law. This judgment does not, therefore, simply cover frustrating enforcement of an English court judgment. Asset-stripping a company to frustrate enforcement of a foreign court judgment could also create an actionable wrong under English law.
There are powerful lessons to be learned from this case. Defendants who try to avoid paying judgment debts must tread very carefully to avoid risking personal liability. Claimants who are the victim of post-judgement assets stripping can, however, take heart – they may be able to pin the blame upon persons/entities with assets.