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27 April 2010
The recent High Court decision in Sita UK Group Holdings Limited v Serruys(1) concerned an application by the defendants to be released from undertakings given in lieu of an injunction by reason of the claimant's non-disclosure of certain factual matters.
The proceedings related to the sale of the defendant's scrap metal business to the claimant. The sale was by way of a share sale agreement, which contained the usual form contractual warranties and provided for any breaches of warranties to be compensated by a maximum of half the consideration (£45.75 million).
The claimant brought proceedings against the defendants, alleging that fraudulent misrepresentations were made to induce the share sale agreement. The misrepresentations relied on by the claimant included statements which later became warranties. These statements were set out in a financial information report prepared by PricewaterhouseCoopers for the defendants. The first defendant allegedly gave express confirmation that this report was a fair reflection of the company's recent results with no material omissions.
The claimant further alleged(2) that the defendant's company was engaged in dishonest business practices, and that the first defendant was aware of this dishonesty when participating in the sale.
On the basis of the alleged fraudulent representations, the claimant applied for and obtained a freezing injunction in April 2008. On the return date, they accepted undertakings in lieu from the defendants.
The proceedings concerned applications (i) by the claimant to continue the order, while disclosing certain factual matters previously not know to the court, and (ii) by the defendants to be released from their undertakings by reason of non-disclosure and to receive damages.
The defendants argued that the claimant's non-disclosures were serious, not properly explained and drawn to the court's attention at a very late stage. They asked that if the court inferred that the disclosures were deliberate, then the freezing injunction be discharged (as per Global Funds Management Asia Ltd v Securities Commission).
The judge had to reconcile the need for disciplinary action in light of significant non-disclosures with the duty to do justice. The claimant relied on the principle of proportionality and the fact that the court's primary responsibility was to do justice, whereas the defendants' submissions concentrated on the disciplinary arguments.
In deciding whether to exercise its discretion to discharge the original order, the court had particular regard to the nature and materiality of the non-disclosures and the manner in which they came about. It considered whether the non-disclosures were deliberate or accidental, and whether the innocent party has suffered damage as a result of the order.
In considering the individual non-disclosures, the court was particularly critical of one of the claimant's employees who had been aware of the dishonest practices and had deliberately withheld information from his employers. Although the court found that this employee's actions could be attributed to the claimant, it recognized that the board was unaware of the information. Nonetheless, the court criticized the board for failing to ensure that its zero-tolerance corruption policy was observed.
The court concluded that the non-disclosures by the claimant were not accidental, as the claimant's employee who was aware of the dishonest practices was involved in the preparation of the original application. However, the court also recognized that it was not the claimant's intention deliberately to deceive the court for fear of losing the relief sought.
The claimant's delay in bringing the non-disclosures to the court's attention was not a significant factor in the court's decision. However, the court gave considerable weight to the claimant's conduct in administering the order, observing that if there had been evidence of unreasonable conduct by the claimant on this point, the court would have refused to consider making or extending the order.
The court compared the injustice that the claimant would suffer from revocation of the order with the burden on the first defendant of complying with the order until trial. Although the non-disclosures were found to be serious and culpable, they were not a deliberate attempt to obtain a forensic advantage and, significantly, the claimant had a good arguable case.
The court concluded that continuing the order would not place a disproportionate burden on the defendants, and that there would be a risk of dissipation of assets if the order were to be discharged. The risks of injustice were therefore too great and the order should continue until trial. However, the court indicated its disapproval of the non-disclosures by ordering the claimant to pay the costs of the applications on an indemnity basis.
This case demonstrates that the overriding issue for the court, when considering non-disclosure in this context, is to consider what is in the interests of justice, rather than adopting a strict approach to the disciplinary provisions. The decision is also significant for the court's emphasis on the claimant's conduct of the freezing order and highlights the importance of administering such orders in a reasonable manner.
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