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A practical guide to worldwide freezing injunctions

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28/09/2017

What is a freezing order?

A freezing order is an injunction which restrains a defendant or potential defendant from disposing of or dissipating assets. A freezing order is typically obtained by a claimant or potential claimant, such as a bank or other financial institution, who wishes to ensure that a [potential] 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, property and so on.

A freezing injunction is an equitable remedy which is granted at the courts’ discretion. That means that the usual equitable bars can apply as hurdles for an applicant to overcome, including:

  • The equitable maxim of clean hands. That is, unless the party seeking the injunction is free of wrongdoing, the court will not exercise its discretion; and
  • The doctrine of ‘laches’ (delay). An application may be barred if it is not brought within a timely manner.

Freezing orders are endorsed with a penal notice, so that if a respondent fails to comply, it will be in contempt of court and can face a fine, imprisonment or seizure of assets.

The requirements

Freezing orders, by their very nature, have a severe restrictive impact. They are therefore not issued by the courts lightly and there are additional requirements with which an applicant must comply.  To obtain a freezing order:

  • The applicant must have a substantive cause of action against the respondent (the [potential] defendant);
  • The applicant must have a good arguable case;
  • There must be a real risk of dissipation of assets; and
  • 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 freezer; and whether such an order would cause legitimate and disproportionate hardship for the respondent.

The requirement for a cause of action means that the applicant must explain to the court its substantive claim, and the facts and evidence upon which it relies, at the time of the freezing order application. The applicant must also demonstrate that its case is good and arguable, which is a relatively high threshold. Case law [1] has suggested that, whilst a freezing order applicant is not required to show a better than 50% chance of success, it does have to establish that its case is more than barely capable of serious argument. That is a higher standard than the mere ‘serious question to be tried’ test that is required for other, less draconian, injunctions.

In the common circumstances where proceedings are contemplated but have not yet been formulated when a potential claimant gets wind or suspects that a defendant might be about to dispose of its assets, a freezing injunction application – and therefore a substantive claim – has to be made urgently and within a very tight timescale. The freezer must be obtained before the assets disappear or it will be worthless.

Assets and risk of dissipation

As a recent Court of Appeal case has confirmed, one of the key components of a successful freezing order application is being able to demonstrate to the court that there are assets in existence. Only once an applicant has managed that, can it begin to go on to convince the court that such assets are at risk of dissipation.  (The questions of the existence and whereabouts of assets can come to the fore, in particular, in worldwide applications.)

The case of Ras Al Khaimah Investment Authority & Ors v Bestfort Development LLP & Ors [2], considered the proper test, on an application for a worldwide freezing injunction, for showing that the respondent had assets that could be caught.  The Court of Appeal held that it was not enough for an applicant to assert that the respondent was apparently wealthy and must have assets somewhere; rather the applicant must “satisfy” the court of the existence of assets.  Demonstrating mere likelihood would not suffice but, whilst an applicant cannot necessarily be expected to know of the existence of another’s assets, it must be able to show a good arguable case or grounds for belief in their existence.

As to the risk of dissipation, an applicant needs to adduce solid evidence that, without a freezing injunction, the [potential] defendant will place assets out of reach of enforcement. Mere unsupported statements or expressions of concern will carry little, if any, weight. In preparing its evidence an applicant should consider:

  • The nature of the assets in question and how quickly or easily could they be disposed of?
  • The financial standing of the [potential] defendant and the relative value of the claim as against his/her assets.
  • Whether the defendant operates a business and, if so, how long the business has been established and how reputable it is. The more longstanding a business, the more goodwill it will have acquired, and the less likely it may be that a defendant would risk dissipation of assets.
  • Where is the [potential] defendant (and any business) based? There is generally less risk of dissipation with purely domestic defendants and a correspondingly higher risk with those domiciled or incorporated abroad. The tax and company laws of the country of domicile or incorporation may also affect the level of risk of dissipation.
  • The [potential] defendant’s behaviour. Evidence of prior credit or judgment default, threats to dissipate, poor commercial morality, evasion and/or refusing to cooperate with reasonable requests for disclosure or for settlement discussion may help to establish a real risk of dissipation.

Applicants’ obligations

Applicants must also:

  • Give full and frank disclosure of all relevant information to the court; and
  • Provide certain undertakings to the court, including an undertaking in damages to compensate the respondent if it is ultimately decided that the injunction should not have been awarded. The undertaking in damages can be very substantial and the applicant may, in some cases, be required to provide security.

The obligation to give full and frank disclosure is onerous and strict. Invariably, freezing injunctions are sought on a ‘without notice’ basis. (Giving notice of a freezing order application is tantamount to tipping off, and could therefore give the untrustworthy respondent the time they need to place assets out of reach, thereby rendering the order useless.) With the respondent being absent and therefore unable to make representations at the initial freezing order hearing, the applicant and its legal advisors are under a duty to ensure that all material facts are brought to the court’s attention.

It is not for the applicant to decide what information the court might need. The applicant must disclose all facts and information, consideration of which would enable the court to properly exercise its discretion. That includes any facts which may adversely affect the applicant’s own case; the length of time any dispute has been ongoing (the longer a dispute has been ongoing, the less likely is the risk of dissipation of assets); and any relevant facts which might not necessarily have been within the applicant’s or its advisors’ actual knowledge, but which they could have discovered had they made reasonable enquiries.

Ancillary orders

Finally, to ensure the effectiveness of a freezing order, applicants should consider whether also to seek certain other orders in support. For example, a disclosure order is generally essential, as it requires a respondent to disclose its assets. In particularly high risk cases, search and seizure orders; third party disclosure orders; orders requiring cross-examination of a respondent about his or her assets; orders against third parties holding assets which, in truth, belong to the respondent; and/or orders requiring delivery-up of a respondent’s passport, may be made.

Applicants must also consider where any assets within their sights are located. A freezing order may only be enforced in another jurisdiction with the English court’s permission. It is not enforceable outside the jurisdiction, and is not binding on third parties overseas, until it has been recognised, registered or enforced in the local court. In many cases applicants may, therefore, wish to apply for a worldwide freezing order.

Where an applicant’s claim is not just monetary but concerns equitable rights over assets themselves, the court may grant a proprietary injunction (that is, an order as to ownership of assets) alongside, or instead of, a freezing order.

Practical advice

Freezing order applicants should note the following:

  • Satisfy yourself that there are sufficient assets available to freeze. Not only will you need to satisfy the court in any event, but you will need to know from the outset that a freezing order will be financially worthwhile. Legal advisors and external investigators/tracing agents will be able to assist.
  • Resource the application properly. Freezing order applications are costly in terms of time and money. With the added pressure of urgency where there is a risk of imminent dissipation, the preparation and issue of the without notice application for the interim freezer, the on-notice return application to continue the freezer, and the underlying claim mean that client contacts and legal representatives are likely to be working around the clock.
  • Be prepared to assist the court by answering any questions it may have. Remember the duty of full and frank disclosure and the general duty not to mislead the court.
  • Consider the practical machinations. As well as complying with the necessary legalities, you may need the use of office space and materials close to the court building to ensure that all administrative and procedural matters are dealt with, and all necessary documents served, immediately following the initial hearing. Applicants will also need to liaise with banks, possibly HM Land Registry and other third parties to implement the freezing order as soon as it is obtained.
  • Note that applicants will have to pay court fees for the initial hearing, the return hearing and issuing the claim up front.
  • Stay calm. Freezing injunction applications are often highly pressurised situations for clients and advisors alike. Remaining calm throughout the process can help to keep stress levels, and mistakes, to a minimum.
  • As with anything this important, make sure you have an expert team around you. Issue in the High Court and instruct solicitors and counsel with experience of successfully obtaining and implementing freezing injunctions.

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[1] Ninemia v Trav Schiffahrtsgesellschaft mbH [1984] 1 All ER, CA
[2] [2017] EWCA Civ 1014

 

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