FSA did not need to cover third party losses from freezing injunction

The Supreme Court has said that public authorities, such as the FSA, should generally not have to give cross-undertakings to cover costs and losses incurred by third parties as a result of injunctions.

“The starting position at each stage should in my view be that no cross-undertaking should be required unless circumstances appear which justify a different position,” Lord Mance said.

“Any inhibition on the part of a public authority about giving an undertaking is likely to be greater, rather than less, at a without notice stage.

“To require a blanket undertaking in favour of third parties at that stage would provide no incentive to third parties to come forward and identify any real concerns that they might have.

“The better approach is in my view to regard the starting position, that no cross-undertaking should be required, as being as applicable at the without notice stage as it is at the on notice stage.”

Lord Mance was giving the judgment of the court in FSA v Sinaloa Gold and others [2013] UKSC 11. The FSA made a without notice application for a freezing injunction against Sinaloa Gold and PH Capital Invest under Section 180 of the Financial Services and Markets Act 2000.

The court heard that the FSA accused both companies of promoting the sale of shares without authorisation. In its application for an injunction, the FSA gave an undertaking both to cover the “reasonable costs” of third parties and to compensate them for losses.

Having obtained the injunction, the regulator later applied to the court to get the wording relating to losses removed. Sinaloa had six bank accounts at Barclays and the bank intervened to oppose the FSA’s application.

The High Court rejected the regulator’s application, but the Court of Appeal accepted it, as did the Supreme Court.

Lord Mance said there was a distinction between private applications for injunctions and those by public bodies.

“Ultimately, there is a choice. Either the risk that public authorities might be deterred or burdened in the pursuit of claims in the public interest is accepted as a material consideration, or authorities acting in the public interest must be expected generally to back their legal actions with the public funds with which they are entrusted to undertake their functions.”

Lord Mance dismissed the bank’s appeal. Lords Neuberger, Clake and Sumption and Lady Hale contributed to the judgment.