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Freezing orders: the litigator’s nuclear weapon

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10/01/2018

The strict obligations facing a freezing order applicant have hit the legal headlines in several recent cases. Walker Morris’ Commercial Dispute Resolution specialists Gwendoline Davies explains.

Freezing orders: Significant tactical weapon

A freezing injunction or order restrains a defendant or potential defendant from disposing of or dissipating assets. A freezing order is typically obtained by a claimant or potential claimant who wishes to ensure that a defendant’s assets remain available pending the enforcement of a court judgment. Various different types of assets can be frozen, including bank accounts, shares, investments, land, and property. A defendant’s interest in assets held on trust can be frozen and the order can be made against assets or interests within England and Wales or worldwide. If a defendant fails to comply with a freezing order, this amounts to a contempt of court and the defendant can face a fine, imprisonment or seizure of assets.  They can therefore be a very significant tactical weapon in a claimant/applicant’s arsenal and can have the effect of bringing what otherwise might have been lengthy proceedings to an end prematurely, given the amount of pressure they can exert on defendants.

Freezing orders are draconian and have been described by the Court as a “nuclear weapon”. However, they are usually obtained urgently, on an interim basis and without notice of the application being given to the defendant. Because the defendant is not given notice of the initial hearing of the application and is therefore unable to make representations prior to a return hearing by which time the freezing order will already have been made, the claimant is under a duty to ensure that all material facts are brought to the Court’s attention.

Requirements and applicant’s obligations

To obtain a freezing order:

  • The claimant must have a substantive cause of action against the defendant.
  • The claimant must have a good arguable case in respect of which the English Court has jurisdiction.
  • There must be a real risk of dissipation of assets.
  • It must be just and convenient to grant the freezing order, bearing in mind the conduct of the applicant (‘clean hands’); the rights of (and any impact upon) any third parties who may be affected by the freezing order; and whether such an order would cause legitimate and disproportionate hardship for the respondent.

In addition, and particularly where freezing orders are obtained on an interim/without notice basis, claimants must:

  • Give full and frank disclosure of all relevant information to the court.
  • Provide certain undertakings to the court, including an undertaking in damages to compensate the defendant if it is ultimately decided that the injunction should not have been awarded; and if made pre-action, to issue the claim form for the proceedings in respect of which the claim arises on the same or next working day.

The claimant’s obligations when obtaining a freezing order – in particular in relation to the giving of both full and frank disclosure and the requisite undertakings – have hit the legal headlines in several recent cases.

Recent key cases

Failure to give full and frank disclosure

In Roman Frenkel v Arkadiy Lyampert (1) and La Micro Group (UK) Ltd (2) [1] an interim freezing order had been granted on the claimant’s without notice application.  At the return hearing, however, where the Court was required to decide whether or not the freezing order should be continued, it became clear that the claimant had been guilty of material non-disclosure.

First, the claimant had not notified the court that he had also served court proceedings on the defendant in the US. That fact was highly significant because it demonstrated that the defendant had taken no steps to dissipate his assets even though it was aware that the claimant was pursuing similar claims in the US.

Second, the claimant’s lawyers had failed to make proper enquiries about, and had therefore failed to disclose to the Court, the fact that the claimant had made a prior without notice application, which had been refused for lack of evidence.

Third, the claimant had not given the Court the full picture about the underlying facts in the litigation. Had he done so, the potential impact of a freezing order on the second defendant would have been understood and the interim injunction may not have been awarded.

Fourth, the claimant had not brought to the Court’s attention that the draft freezing order sought was not in the standard form.

Finally, the claimant had not served his application for the continuation of the freezing order on the defendant as soon as was practicable after the without notice hearing.

The claimant’s failure to give full and frank disclosure was serious and significant and the freezing order was therefore discharged.

Cost of a cross-undertaking in damages

The non-continuance of an interim freezing order and/or the dismissal at trial of the claims underlying the granting of the order can similarly have serious consequences for the claimant.

The undertaking in damages required to be given by a claimant seeking a freezing order can be very substantial and the claimant may, in some cases, also be required to provide security or “fortification” of that undertaking. In circumstances where an interim freezing order is discharged, the undertaking can be called upon and the claimants potentially exposed to a significant liability.

In SCF Tankers Ltd & Ors v Privalov & Ors [2] the Court of Appeal applied the principles governing the award of damages against the party who has given a cross-undertaking in damages in the course of obtaining an interim freezing order.

The freezing order in question, granted in 2005, prevented the defendant from entering into shipbuilding contracts (albeit the order allowed the defendant liberty to apply to the court for permission to use frozen funds for that purpose on an application-by-application basis). In 2010, after trial, the claimant’s claims were dismissed and the defendant sought compensation pursuant to the undertaking in damages.  Assessing the damages payable to the defendant, the Court of Appeal confirmed:

  • The burden is on the party seeking to enforce the undertaking to prove that its loss would not have been sustained but for the freezing order.
  • Once that party had established a prima facie case that its loss was caused by the freezing order then (in the absence of material to displace it) the Court was entitled to draw the inference of causation.
  • In this case, the fact that the defendant was given liberty to apply to release funds for the purpose of entering into shipbuilding contracts did not affect the nature of the restriction imposed by the freezing order. It sufficed for the defendant to show that the order prevented it from entering into such contracts and to demonstrate the difficulties of any application to the Court for permission to release frozen funds.
  • As with other damages claims, it is open to the paying party to try to minimise its liability by alleging failure on the part of the receiving party to mitigate its loss.
  • In this case, however, the failure to mitigate argument was dismissed because the defendant had faced the practical dilemma that it could not enter into shipbuilding contracts without the Court’s permission and without a concrete shipbuilding contract proposal it had nothing with which to convince a Court that permission should be granted.

Resulting in an order that the claimant pay US$59.8 million in damages and US$11.04 million in interest, this case is a salutary lesson in the potential consequences for a claimant seeking a freezing order as to the potential costs of getting it wrong.

Ordinary and proper course of business

Whilst freezing orders are obviously highly restrictive, the law recognises that they should not be used oppressively. Respondents should not be forced to cease trading and they should be allowed to meet reasonable expenses. Standard form (non-proprietary) freezing orders therefore place a cap on the value of assets to be frozen and except ordinary living expenses, reasonable legal costs and dealing with or disposing of assets in the ordinary and proper course of business.

Case law [3] has previously confirmed that, in determining whether a payment or any other asset-dealing falls within the ‘ordinary and proper course of business’ exception, the Court will consider:

  • Whether the course of business in question – not the payment itself – is ordinary.
  • Whether the payment/dealing is in satisfaction of any pre-existing liability. If it is, the transaction is one that the Court would be likely to permit.
  • ‘The ordinary and proper course of business’ does not necessarily equate to ‘routine’ or ‘recurring’ dealings and it is not restricted to the payment of trade creditors.

The recent case of Koza Ltd & Anor v Akçil & Ors [4] provides confirms that the Court should take into account:

  • What an objective observer, with knowledge of the business entity in question, would conclude was in the ordinary and proper course of its business.
  • What the parties could have intended on the proper interpretation of the undertaking.
  • That just because proposed expenditure is unprecedented or exceptional does not, of itself, mean that it is outside the ordinary and proper course of business.
  • That if proposed expenditure would give rise to a breach of fiduciary duty by directors, then that might lend support to the conclusion that the expenditure would not be in the ordinary and proper course of a company’s business.

WM Comment

Whilst freezing orders are often a very valuable tactical remedy for claimants, they are by their nature usually sought in situations of urgency, without perfect information and often prior to underlying proceedings having been issued. The stakes are high: the very serious potential consequences of getting it wrong are to be balanced against the need to take urgent action when evidence emerges that assets are at risk of being dissipated. Claimants can be under pressure to undertake a lot of work in very little time, given the need to comply with the procedural and substantive requirements of the application whilst at the same time readying their underlying proceedings against the defendant, if not already issued.

The potential rewards from getting it right are powerful. The urgency and pressure to comply with a freezing order is intense. The consequences are draconian and the application for a freezing order is likely to include stringent asset disclosure obligations and, potentially, other very serious collateral relief not addressed in this note.

Freezing orders are therefore correctly described as a nuclear weapon, with potentially devastating consequences in the context of litigation both for the defendant and, conversely, for an unsuccessful claimant.

For these reasons, clear, calm but decisive advice is required both when applying for and responding to freezing orders.

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[1] [2017] EWHC 3121 (Ch)
[2] [2017] EWCA Civ 1877
[3] Michael Wilson & Partners Ltd v John Foster Emmott [2015] EWCA Civ 1028
[4] [2017] EWHC 2889 (Ch)

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