Assessing loss suffered as a result of a freezing injunction

This article first appeared in the Solicitors Journal and is reproduced with their permission.

A recent case has shed welcome light on the correct measure of loss following the discharge of an injunction, says Ruth Hughes

The way losses suffered as a result of a freezing order should be assessed was considered most recently in Abbey Forwarding Ltd v Hone [2012] EWHC 3525 (Ch). The case involved an inquiry as to the amount recoverable by three former directors of Abbey Forwarding Ltd from Abbey pursuant to the undertaking in damages that the company had given when it obtained a freezing order against them. The underlying claim related to alleged excise fraud and, accordingly, HMRC indemnified Abbey in respect of 
the undertaking.

Assessments had been raised against Abbey in respect of VAT and excise duty. Abbey sued its former directors for breach of their duties to Abbey. Abbey obtained a freezing order against three of the directors. At trial, Lewison J found in favour of the directors ([2010] EWHC 2029 (Ch)). He ordered an inquiry as to the loss suffered by the directors as a result of the injunction.

The directors alleged that as entrepreneurs they had suffered very significant pecuniary losses relating to many business ventures which they claimed they would have pursued if it had not been for the freezing injunction. Such losses were alleged to amount to up to £1.9m. In addition, they claimed general damages, aggravated damages, exemplary damages and also for loss suffered by their families.

Loss foreseeable

As a matter of law the directors relied on the case of Lilly ICOS v 8pm Chemists [2010] FSR 4 which suggested that loss pursuant to the undertaking in damages was measured by analogy with the principle in relation to equitable compensation and that neither the unforeseeability nor the remoteness of loss was a bar to recovery.

HHJ Pelling QC, sitting as a judge of the Chancery Division, held, relying on dicta of Lord Diplock in Hoffman-la-Roche v Secretary of State for Trade and Industry [1975] 1 AC 295, that the decision in Lilly ICOS was made per incuriam and that the correct approach to the measure of loss was analogous to the rules in contract i.e. those found in Hadley v Baxendale (1854) 9 Ex 341. It was necessary therefore for the directors to show that the loss that they had suffered was foreseeable and not too remote and they also had a duty to mitigate their loss.

An analogy with equitable compensation is difficult for the court to draw because there are many different types of compensation in equity to which different rules of causation apply, depending on the context, purpose and history of the particular type of compensation. Rules requiring that damage be foreseeable and that loss be mitigated are appropriate because an injunctor ought to be put in a position where he can make a commercial decision as to whether or not he should maintain the injunction.

Duty to mitigate

The directors maintained that Abbey had rejected so many of their requests for funds that they were entitled to assume any further such requests would be rejected. They claimed that as a result of the “knockbacks” from company they were not required to mitigate their loss by applying to court. HHJ Pelling QC held that the directors could not make out this case on the facts. In particular, the directors had difficulty in establishing that much of the alleged losses were as a result of the freezing injunction as distinct from the liquidation of Abbey (which caused them to lose their livelihoods and embroiled them in allegations of tax evasion) or the litigation relating to the alleged breach of their directors’ duties.

The court struck out the directors’ claims for exemplary damages and for third-party losses on the basis that they were not within the scope of Abbey’s undertaking. It held however that the directors could in principle claim general damages and aggravated damages in relation to the directors’ emotional distress, reputational damage and indignity. Damages for personal injury related to emotional distress (i.e. in the nature of mental illness) would have been recoverable if it had been proved that the alleged personal injury had been caused by the freezing injunction.

The directors recovered in total less than £30,000. Abbey and HMRC obtained a partial indemnity costs order.

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