The UK courts have recently clarified matters in cases where there is any risk of defendants dissipating assets prior to enforcement of a judgment.
What is a freezing order?
A freezing order  is an interim 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 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. Case law has long established that a freezing order does not prevent a [potential] defendant from borrowing money and that the right to borrow is not an asset for these purposes.
However, in the recent case of JSC BTA Bank v Ablyazov  the Supreme Court considered whether, in light of the wording of the order (which, for all relevant purposes, was in the standard form ) loan monies were an asset that could be frozen.
The wording was that: “…the respondents’ assets include any asset which they have power, directly or indirectly, to dispose of, or deal with as if it were their own. The respondents are to be regarded as having such power if a third party holds or controls the assets in accordance with their direct or indirect instructions.” Although the respondent did not own the proceeds of loan agreements that he had entered into, he was legally entitled to direct the lender what to do with the funds. As such, the loan monies were caught by the wording of the freezing order, and were therefore assets which could be frozen.
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.
When the court does grant a freezing order, this is 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. Due to the severe restrictive impact of a freezing injunction, there are additional requirements with which an applicant must comply.
What are the requirements?
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  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.
How can an applicant convince the court that there is a ‘real risk’ of dissipation? The 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.
In Metropolitan Housing Trust v Taylor  the applicant sought to establish a risk of dissipation through inferences to be drawn from the respondent’s allegedly dishonest conduct. Although it is sometimes possible to infer a risk of dissipation from the fact of dishonesty, the High Court clarified in this case that a mere assertion of dishonesty in itself is not enough. “Where alleged dishonesty is relied on… in support of a risk of dissipation, it is important to consider whether a good arguable case of dishonesty is established in relation to the conduct relied on. If…not…, that conduct is not relevant to the argument that there is a risk of dissipation” . Further, the case confirmed that, even where a respondent has behaved in an improper way, the impropriety must be of a type which leads to the conclusion that the respondent would deal with his or her assets in such a way as to make enforcement of a judgment more difficult, or the impropriety will be irrelevant.
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.
Exceptions and ancillary orders
Freezing orders are obviously highly restrictive, but 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 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.
In Michael Wilson & Partners Ltd v John Foster Emmott  the Court of Appeal recently looked in detail at how to determine whether a payment or any other asset-dealing falls within the ‘ordinary and proper course of business’ exception. In summary, 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; and
- ‘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.
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 should 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. Applicants may, in some cases, 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.
So, what practical advice can we offer freezing order applicants?
- 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.
- Treat it as a trial. The initial hearing is effectively a trial of the merits of the underlying claim and of whether the freezing order requirements have been met. Applicants will need a full bundle, with copies for the court; counsel; applicant’s solicitor; each respondent (for service in due course); the process server; and a spare. The bundle should include evidence in support of the freezer application given in the form of an affidavit, as well as a draft freezing order, the draft claim and a skeleton argument.
- 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.
- Take a verbatim note of the initial hearing. This must be served on the respondent.
- 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. Applicants must also instruct and coordinate process servers: the interim freezing order; the note of hearing; the return application; and the issued claim will need to be served, urgently and personally, on all respondents with sufficient notice prior to the return date.
- 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.
 Also known as a Mareva injunction, following Mareva Cia Naviera SA v International Bulk Carriers SA  1 All ER 213, in which case such an order was first granted. The courts’ jurisdiction to grant a freezing injunction derives from section 37 of the Senior Courts Act 1981 and Civil Procedure Rule (CPR) 25 and Practice Direction (PD) 25A.
  UKSC 64
 Standard form freezing orders are annexed to both CPR PD 25A and to the Admiralty and Commercial Courts Guide (at Appendix 5).
 Ninemia v Trav Schiffahrtsgesellschaft mbH  1 All ER, CA
  EWHC 2897 (Ch)
 Ibid, para. 369
  EWCA Civ 1028