Money from third-party funder not caught by client’s worldwide freezing order

Harrison: Ruling will be widely welcomed by practitioners

Money provided to solicitors by third-party funders were not caught by a worldwide freezing order (WFO) imposed on their client, the High Court has ruled.

Mr Justice Zacaroli also rejected the contention that London firm Keidan Harrison (KH) and Hertfordshire practice Rayden were in breach of the WFO, and so in contempt of court under its terms, by using the funds to discharge their fees.

We reported yesterday on one part of his ruling last week in Tonstate Group Ltd & Ors v Wojakovski & Ors [2021] EWHC 1122 (Ch), dealing with the interpretation of a damages-based agreement.

The litigation concerns Tonstate Group, a property investment business, half owned by Edward Wojakovski, and half by a Mr and Mrs Matyas.

The other main part of the ruling dealt with an application for disclosure by Mr Wojakovski of the source of funding for the legal advice provided by KH in relation to his bankruptcy and Rayden over family law proceedings.

The applicants argued that Mr Wojakovski was in breach of WFO made against him last August to inform them, before spending any money on legal expenses, where the money was to come from.

Further, they said that by using the third-party funds they held when they knew that Mr Wojakovski had not complied with the WFO, the law firms were in breach of the WFO and in contempt of court.

In the alternative, the applicants sought orders to disclose the information pursuant to the court’s jurisdiction under section 37 of the Senior Courts Act 1981 to make orders ancillary to and in aid of enforcement of the WFO.

The WFO used standard wording to provide that Mr Wojakovski could spend “a reasonable sum” on legal advice and representation subject to telling the applicants where the money was to come from.

Rayden voluntarily disclosed the two sources of its funding, which it said was provided both “wholly gratuitously”.

KH had not disclosed its source but the evidence of partner Luke Harrison was that the funds again were given “voluntarily and gratuitously”.

The applicants’ case was that any money held by the solicitors, from whatever source, was caught by the WFO for being “any asset which [Mr Wojakovski] has the power, directly or indirectly, to dispose of or deal with as if it were his own”.

The WFO said he was to be regarded as having such power “if a third party holds or controls the asset in accordance with his direct or indirect instructions”.

Zacaroli J held that, though the Supreme Court’s 2015 ruling in JSC BTA Bank v Ablyazov confirmed that this definition captured assets owned by third parties, it did not mean that the funds held on account by the solicitors here were as well.

Unlike Mr Ablyazov, the judge said, Mr Wojakovski had “no entitlement to direct that the funds be used for any purpose at all”. For example, he could not direct that they be paid to him or to anybody else.

He continued: “Insofar as the funds were to be used to discharge the solicitors’ fees, that was not at the direction of Mr Wojakovski, but was at the direction of the third party who provided the funds: the funds had been provided for that sole purpose.

“I reject the submission that because the solicitors would only do work, and thus incur an entitlement to payment, if Mr Wojakovski instructed them to do work, that was sufficient to demonstrate that the funds were held, even indirectly, in accordance with his instructions.

“That conflates Mr Wojakovski’s ability to direct what work his solicitors carry out with the ability to direct to what use the funds are to be put.”

Zacaroli J agreed with Rayden’ counsel that the applicants’ construction would create considerable uncertainty and lead to “fine distinctions”, such as around timing.

For example, if a law firm received third-party funds after it had performed the work, and so was entitled to fees, the money would not be an asset as defined by the WFO. “That is because there is no further instruction from the client necessary in order for the funds to be used to discharge their fees.”

But the judge went on to make an order against Mr Wojakovski under section 37 to provide details of his funders, having accepted there was a “real risk” that the ongoing funding of his legal expenses may be in breach of the WFO or a proprietary injunction issued last year – and that KH must do so if he did not.

Mr Wojakovski’s main objection was that the funders would be subject to “aggressive and oppressive conduct” from the applicants.

Zacaroli J said: “It is true that the applicants have adopted a strikingly aggressive stance against Rayden and KH, as evidenced by the fact that while Rayden have provided the information sought voluntarily and KH have not opposed an order under section 37, the applicants have pursued arguments designed to establish that Rayden and KH are in contempt of court.

“I do not think, however, that when set against the factors identified above, this disentitles the applicants from obtaining the orders sought in order effectively to police the WFO and the proprietary injunction.”

The judge also expanded the WFO to provide that, before any further sum is paid in respect of his legal expenses by any person, Mr Wojakovski must give the applicants details of the source.

In a statement, Mr Harrison described the application made against his firm as “a highly unusual and aggressive step”, and also unnecessary given the alternative route under section 37.

“The inference that can be drawn from their conduct is that their true aim was to restrict Mr Wojakovski’s access to legal advice and access to justice. I am pleased that Keidan Harrison’s actions in the case were found by the judge to have been completely appropriate.”

Mr Harrison said the ruling would be widely welcomed by practitioners acting for defendants.

“Had the claimants’ arguments succeeded, that would have created a significant impediment to acting for clients subject to freezing orders where costs are funded by third parties who want to maintain anonymity for fear of becoming ’targets’ themselves and would have had a chilling effect on a party’s ability to access high-quality legal representation.”

A spokeswoman for Rayden said: “It can be very intimidating for a matrimonial firm to be brought into High Court proceedings.

“We are delighted that we will no longer be brought into this highly litigious civil dispute and that we are able to continue to represent our client in the confidential ongoing matrimonial proceedings.”

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