Freezing Injunctions: A Nuclear Weapon For the Commercial Litigator

Presented by Hefin Rees
Delivered to Carter-Ruck Solicitors, London On 8th December 2009

WHAT IS A FREEZING ORDER?

  1. Where a claimant can show a good arguable claim to be entitled to money from a defendant and there is a real risk that the defendant will remove assets from the jurisdiction, or deal with them so as to render them unavailable or untraceable, the court may grant an injunction to restrain the defendant from removing them from the jurisdiction, or from dealing with the assets (whether located within the jurisdiction or not).
  2. “A NUCLEAR WEAPON”

  3. The freezing order represents an important tool in the armoury of the commercial litigator, which if successful can often result in an early “knock out blow” within litigation against a party who would otherwise seek to evade the enforcement of a judgment obtained against them.  The drastic nature of the freezing order led to it being described somewhat graphically by Lord Donaldson, when he was Master of the Rolls in the mid 1980’s, as “one of the law’s two “nuclear” weapons”; the other being the Anton Piller Order, or search order.   For this reason, this has led the courts to put in place a number of procedural safeguards for respondents in relation to these orders.
  4. THE LIMITED PURPOSE OF FREEZING ORDERS

  5. The freezing order is granted for an important but limited purpose: to prevent a defendant dissipating his assets with the intention or effect of frustrating enforcement of a prospective judgment.  They are not a proprietary remedy.  They are not granted to give a claimant advance security for his claim; although in practice they may have that effect.  They are not an end in themselves.   They are a supplementary remedy, granted to protect the efficacy of court proceedings, domestic or foreign.
  6. A JUDGE-MADE RULE

  7. Since the late 1970s the jurisdiction of the High Court to grant freezing injunctions has been significantly expanded and refined by case law, practice directions and legislation.  The creation of this form of injunction was a judicial innovation, in the case of Mareva Compania Naviera SA v International Bulk Carriers SA (The Mareva)[1].  Lord Hoffman, in his foreword to Commercial Injunctions (4th Edition) by Steven Gee Q.C. described the case of Mareva as “…the most remarkable example of judicial creativity in the last century…”
  8. The freezing order was a Judge-made response in the case of Mareva to the modern means of disposing with assets, and attempts to defeat claims through increasingly sophisticated and complicated schemes, thereby making the tracing of assets more difficult to achieve.  These attempts might include transferring large amounts of cash by electronic transfer from one country to another, switching assets between offshore companies, and hiding assets in offshore trusts, thereby leaving creditors to obtain judgment first and then later to discover and try to unravel what had happened to assets, perhaps through a series of different jurisdictions and entities.  The Mareva line of cases has attempted to put a stop to that practice.
  9. FOURIE v LE ROUX

  10. In the case of Fourie v Le Roux[2] the House of Lords considered the nature of the power and the scope of the jurisdiction to grant freezing orders.  Lord Bingham said:

    “…In recognition of the severe effect which such an injunction may have on a defendant, the procedure for seeking and making Mareva injunctions has over the last three decades become closely regulated.  I regard that regulation as beneficial and would not wish to weaken it in any way.  The procedure incorporates important safeguards for the defendant….”

  11. THE ENGLISH COURT AS “INTERNATIONAL POLICEMAN”

  12. Originally, a freezing order was only obtainable in support of litigation brought within England & Wales.  These days, a freezing order is often obtained in support of foreign litigation, even in cases where the primary court where the litigation is proceeding would not have a similar power to grant a freezing order (e.g. Switzerland[3], USA[4] etc.).  In 2002 Moor Bick J referred to the jurisdiction as enabling the English Court to act as an “international policeman”.  There has, however, been some recent change in the jurisprudence with the English Court showing greater signs of reluctance to interfere[5].

JURISDICTION

    (1) STATUTORY JURISDICTION

  1. The jurisdiction of the courts to grant freezing orders is to be found in s.37(1) & (3) of the Supreme Court Act 1981.
  2. Section 37(1) states:

    “The High Court may by order (whether interlocutory or final) grant an injunction … in all cases in which it appears to the court to be just and convenient to do so.”

  3. Section 37(3) states:

    “The power of the High Court under subsection (1) to grant an interlocutory injunction restraining a party to any proceedings from removing from the jurisdiction of the High Court, or otherwise dealing with, assets located within that jurisdiction shall be exercisable in cases where that party is, as well as in cases where he is not, domiciled, resident or present within that jurisdiction.”

  4. The need to have subsisting proceedings to which the freezing order could be ancillary, or an undertaking to commence such proceedings immediately, was re-iterated by the House of Lords in Fourie v Le Roux[6].  In that case, the liquidator of two South African companies applied to the High Court in London without notice for a freezing order to be made against two individuals and a number of companies.  At the without notice hearing the liquidator stated that he was “intending to proceed in South Africa in terms of statutory inquiries and … various claims would be formulated.”  The High Court granted the application for a freezing order but this was overturned by the Court of Appeal which held that the court had no jurisdiction to grant a freezing order in circumstances where the applicant had no intention of issuing proceedings immediately or almost immediately.  The House of Lords upheld the Court of Appeal decision.
  5. In the absence of the commencement of substantive proceedings, or an undertaking to do so, the court has no jurisdiction (unless the exception provided by s. 25 CJJA applies).
  6. (2) FREEZING ORDERS IN SUPPORT OF COUNTY COURT PROCEEDINGS

  7. Under the County Court Remedies Regulations 1991 a County Court has no jurisdiction to grant a Freezing Injunction.  However, under Article 3 of the High Court and County Court Jurisdiction Order 1991 the High Court shall have jurisdiction to hear an application for an injunction made in the course of, or in anticipation of, proceedings in a County Court.
  8. In Schmidt v Wong[7] the Court of Appeal gave guidance on the procedure to follow in County Court proceedings where an application is sought to the High Court for a freezing order.  However, in Schmidt Buxton LJ observed that caution should be exercised before seeking a freezing order in modest value claims.
  9. (3)FREEZING ORDERS AFTER JUDGMENT IN AID OF EXECUTION

  10. Whilst the majority of freezing orders are obtained at a very early stage, the court continues to have jurisdiction to grant a freezing order at any point in time, even after judgment[8].  This may be an important factor after judgment, as costs are likely to be a significant additional consideration.  The jurisdiction to grant a freezing order extends to support costs orders, even when the costs order is subject to a detailed assessment.
  11. (4) FREEZING ORDERS IN SUPPORT OF FOREIGN LITIGATION

  12. S.25 of the Civil Jurisdiction and Judgments Act 1982, as extended by the Civil Jurisdiction and Judgments Act 1982 (Interim Relief) Order 1997 (“CJJA”) gives the power to the English court to grant interim relief in proceedings that have been, or are about to be, commenced in a foreign state.
  13. The proceedings authorised by the CJJA are free-standing proceedings brought solely for the purpose of obtaining the interim relief.  In such cases, the merits will not be decided in England & Wales.  The cause of action can also be one which will be determined in arbitration proceedings which will be conducted abroad[9].
  14. However, where the cause of action is not one which will be adjudicated upon in England & Wales, careful attention must be paid to the basis upon which it is said that the court has jurisdiction[10].
  15. Under s.25(2) of the CJJA, the court may decide to refuse relief if the fact that the court has no jurisdiction apart from under s.25 of the CJJA “makes it inexpedient for the court to grant it”.
  16. The Court of Appeal has given guidelines on the approach to take in deciding this issue in Motorola Credit Corp v Uzan (No 2)[11] which held that there are 5 considerations which the court should bear in mind when considering the question whether it is “inexpedient” to make an order under s. 25 CJJA:
    1. Whether the making of the order will interfere with the management of the case in the primary court: e.g. where the order is inconsistent with an order in the primary court or overlaps with it.
    2. Whether it is the policy in the primary jurisdiction not itself to make worldwide freezing orders.
    3. Whether there is a danger that the orders made will give rise to disharmony or confusion and/or risk of conflicting inconsistent or overlapping orders in other jurisdictions, in particular the courts of the state where the person enjoined resides or where the assets affected are located. If so, then respect for the territorial jurisdiction of that state should discourage the English court from using its unusually wide powers against a foreign defendant.
    4. Whether at the time the order is sought there is likely to be a potential conflict as to jurisdiction rendering it inappropriate and inexpedient to make a worldwide order.
    5. Whether, in a case where jurisdiction is resisted and disobedience to be expected, the court will make an order which it cannot enforce.
  17. Mobil v Petroleos[12] was a case involving the Venezuelan national oil producer which sought to unilaterally “repatriate” the oil enterprises owned by Mobil to companies that were 60% owned by Venezuela.  Mobil sought ICC arbitration in New York and was granted an ex parte worldwide freezing injunction order under s. 44 Arbitration Act 1996.   Walker J held that were an award can be easily enforced under ICC Rules a freezing order is unlikely to be just and reasonable.  The recipient of the order must be shown to have a sufficient connection to the jurisdiction of England & Wales or there must be some other relevant reason to justify an order.  Strong justification is required to counter the principle of comity with other jurisdictions.  In this case there was no justification for an order since Petroleos had neither assets nor presence nor any dispute in the England & Wales jurisdiction[13].
  18. ETI Euro Telecom v Bolivia[14] was a case involving Bolivian decrees unilaterally nationalising shareholdings in ETI’s subsidiary company.  Arbitration proceedings were commenced and ETI sought a worldwide freezing order against the Bolivian Government.  In this case there were assets in London.  The court held that s. 25 CJJA did not apply since the New York order sought was for an attachment in aid of arbitration only for assets held in New York.
  19. However, in Mediterranean Shipping v OMG International[15] a mafia fraud case the court held that where there is cogent evidence of fraud, even though there were no assets in the jurisdiction and the court would not ordinarily have granted the order, it was apparent that the fraud had been perpetuated in the UK and worldwide and therefore international co-operation was essential.
  20. (5) FREEZING ORDERS IN SUPPORT OF A FOREIGN JUDGMENT

  21. Freezing orders can also be obtained as an ancillary aid to the enforcement of foreign judgments, which are registered in the High Court pursuant to CPR Part 74 under the Administration of Justice Act 1920, the Foreign Judgments (Reciprocal Enforcement) Act 1933, Council Reg. (EC) 44/2001, and the CJJA.

THE KEY FACTORS TO BE CONSIDERED BEFORE A FREEZING INJUNCTION WILL BE GRANTED

(1) “GOOD ARGUABLE CASE

  1. The test of a “good arguable case” is not very high.  The claimant does not need to show a case against the defendant that is so strong that he is likely to obtain summary judgment under CPR Pt 24.
  2. In The Niedersachsen[16] Mustill J held that a “good arguable case” was “one which is more than barely capable of serious argument, but not necessarily one which the judge considers would have a better than 50% chance of success”.
  3. However, it must be borne in mind that the “good arguable case” test is a threshold test and, given that the overriding test is whether or not it is “just and convenient” to grant the injunction, even if this minimum threshold requirement is satisfied, the strength or otherwise of the applicant’s case will be a relevant factor in the exercise of the court’s overall discretion.
  4. (2) REAL RISK OF DISSIPATION

  5. The claimant must adduce “solid evidence” to support his assertion that there is a real risk that the judgment or award will go unsatisfied[17].  The test of real risk of dissipation is objective, and is one of assessment of the risk by the court that a judgment may not be satisfied.
  6. Generally, unsubstantiated assertion by the applicant will not be sufficient.
  7. If the applicant can adduce “solid evidence” that the respondent has acted dishonestly, then there may be no need for any other specific evidence that the respondent intends to dissipate his assets.
  8. The claimant needs to show that there is a real risk that the defendant will dispose of its assets otherwise than in the ordinary course of business and thereby make them judgment-proof[18].
  9. THE FACTORS THAT CAN EVIDENCE A RISK OF DISSIPATION

  10. The sort of factors which will be relevant when assessing whether there is a real risk of dissipation of assets are:
    1. The nature of the assets – the more easily disposed of, the easier it is to establish that there is a risk they may be dissipated.
    2. The nature and financial standing of the defendant’s business[19].
    3. The length of time the defendant has been in business[20].
    4. The domicile or residence of the defendant.
    5. The defendant’s past or existing credit record.
    6. Any intentions expressed by the defendant about future dealings with his English assets, or assets outside the jurisdiction.
    7. Any connections which the defendant may have with other companies which have defaulted on arbitration awards or judgments.
    8. The defendant’s behaviour in response to the claim; a pattern of evasiveness or unwillingness to participate or raising thin defences or total silence may all be relevant factors.
  11. The applicant is not required to show on the balance of probabilities that assets will be dissipated. He is only required to show that there is a real (as opposed to an insignificant or fanciful) risk that this will occur.
  12. (3) JUST AND CONVENIENT

  13. The all-important question to determine is whether, in the circumstances of the particular case, it is just and convenient to grant the injunction.  There is an appreciation that with any interlocutory injunction there is a risk that the court may make the “wrong” decision.  Thus, an injunction could be granted and ultimately turn out to be unjustified; or the court may refuse an injunction which is subsequently shown to have been essential if the claimant’s rights were to be preserved.  In the context of freezing orders, there is a discretion to be exercised in all the circumstances of the case.
  14. The court should be satisfied before granting the relief that the likely effect of the injunction will be to promote the doing of justice overall, and not to work unfairly or oppressively.  The circumstances of the case may make it inappropriate to grant a freezing order; even though the claimant shows a good arguable case and a risk that, without the injunction, judgment may go unsatisfied.  An example may be that if an injunction were granted, it would interfere in an unacceptable way with third parties.  Another is where an injunction might itself destroy the defendant’s business[21].

(1) THE DOCUMENTATION REQUIRED

  1. Where it is possible to do so, the applicant must provide:
    1. An Application Notice;
    2. A draft Order.  This must be based on the model draft order which is annexed to the Practice Direction to CPR Part 25;
    3. An affidavit in support.  Witness statements will not suffice.  Those affidavits must set out the applicant’s case and make full and faire disclosure including:
      1. The reasons for making the application without notice[22];
      2. A properly formulated claim, including identifying the relevant causes of action, so that the court can properly conclude that the applicant has a good arguable case in respect of the underlying cause of action;
      3. A proper identification of sources of information and belief (see CPR Part 32).  Broad references to “enquiries made” or “documents in my possession” are not sufficient;
      4. Material upon which the court can properly conclude that there is a real risk of dissipation of assets by the respondent;
      5. Full and fair disclosure of all facts and arguments relevant to the exercise of discretion by the court.
    4. The Claim Form or draft Claim Form;
    5. The Skeleton Argument.  As is considered further below, the obligation to make full and frank disclosure is onerous and the Skeleton Argument is the applicant’s best opportunity to ensure that there can be no doubt that all material matters were brought to the attention of the judge at the without notice hearing.
  2. Where urgency means that it is not possible to provide this documentation, then an applicant will be required to provide an undertaking that the relevant documents will be filed and served within a short period.
  3. DUTY TO PROVIDE FULL NOTES OF HEARING

  4. Applicants are under a duty to provide full notes of the hearing with all expedition to any party that would be affected by the relief sought[23].

DUTY TO BE FULL AND FRANK

  1. There is a high duty to make full, fair and accurate disclosure of all material information to the court and to draw the court’s attention to significant factual, legal and procedural aspects of the case[24].  The reason for this high duty is because the applicant in a without notice hearing is asking the court to undertake the course of granting an injunction against a party in his absence and without the opportunity of presenting his case.   Also, as Lord Scott said in Fourie v Le Roux[25]:

    “…This is a draconian remedy and the strict rules relating to full disclosure by the claimant are a recognition of the nature of the remedy and its potential for causing injustice to the defendant…”

  2. This general duty extends to placing before the court all matters that are relevant to the Judge’s consideration of the application.  The test as to materiality is an objective one: it is not for the claimant to decide the question of relevance.
  3. There is a duty to draw the attention of the Judge to the unusual features of the case, and to draw his attention to any adverse points, and any possible defences that could be used by the Respondent to defend the claim, or resist the granting of a freezing order.
  4. The duty to disclose applies to facts that are known to the claimant or his agents and also facts that they would have known, had they made all the inquiries which should reasonably have been made prior to the application[26].
  5. In the case involving an application for a freezing order under s 25 CJJA the applicant should include in the affidavit matters that go to whether or not it is “inexpedient” for the court to grant interim relief in aid of a foreign court[27].
  6. The duty of full and frank disclosure extends even after the making of the without notice order, such that if prior to service of the Order a material fact becomes known to the claimant then there is a duty to return to court to inform the court of the new development[28].

THE COURT ORDER

(1) MODEL FORM OF ORDER

  1. There is a standard form of injunction Order attached to CPR Pt 25, which should be used.  There is a duty on Counsel to draw to the Judge’s attention any variation that is proposed to the model form of Order.
  2. The order should be drafted so as to result in the minimum interference with the defendant’s rights as its purpose is not to punish the defendant but to protect the claimant[29].
  3. (2) THE MAXIMUM SUM TO BE FROZEN

  4. The practice is to provide for a maximum limit in the order, and this is done to avoid any unnecessary interference with the defendant’s freedom to use his own assets.
  5. In determining the financial limit for a Freezing Order, namely the maximum sum to be referred to in the Order, the court will consider for how much the claimant has a good arguable case.  For example, if the claim is reasonably strong to the value of, say, £100,000, but the claim becomes more speculative thereafter, then the court may well limit the maximum sum to be restrained to the £100,000 figure.
  6. If an injunction is expressed to apply to assets only so far as their value does not exceed a stipulated sum, then if the value does exceed that sum, the injunction allows the enjoined party to deal with his assets to the extent of the excess value.
  7. (3) NATURE OF ASSETS TO BE FROZON

  8. A freezing order can be applied to a very wide range of assets including: cash, goods, properties, ships, aircraft, and industrial machinery.  It has also been held to apply to the goodwill of a company[30], as well as choses in action such as insurance policies.
  9. When a freezing order is obtained in respect of registered land, an inhibition should be lodged with the Land Registry pursuant to s. 57 of the Land Registration Act 1925 (not a land charge under The Land Charges Act 1972).
  10. LIVING EXPENSES

  11. The claimant must make provision for ordinary living expenses, where appropriate, in the draft order on the without notice application.  The amounts specified should have regard to the defendant’s usual standard of living.  If the figure provided is not sufficient, the defendant can apply to the court to increase it[31].
  12. Ordinary living expenses have been described in as “ordinary recurrent expenses involved in maintaining the subject of the injunction in the style of life to which he is reasonably accustomed[32].
  13. As Lloyd J said in PWC (Underwriting Agencies) Ltd v Dixon[33]:

    “I would regard it as unjust in the present case if the defendant were compelled to reduce his standard of living, to give up his flat or to take his children away from school, in order to secure what is as yet only a claim by the claimants. I would regard it as even more unjust that he should be prevented from defending himself properly (for that is what it would amount to), merely because the claimants say that in doing so he is using someone else’s money.”

  14. (5) LEGAL EXPENSES

  15. The court will seek to ensure that a defendant is not deprived of legal representation by reason of a freezing injunction; and particularly where there is no proprietary claim this is an important factor to take into account in favour of permitting the expenditure (see Investors and Pensions Advisory Service v Gray[34]; P v P[35]; and Furylong Ltd v Masterpiece Technology Ltd[36].
  16. CROSS-UNDERTAKINGS ON DAMAGES

  17. Any applicant for an injunction is required to give the court an undertaking to abide by any order for damages which may be made if the defendant suffers loss as a result of the Order and the court is of the opinion that the applicant should compensate him[37].
  18. The court has discretion to require the undertaking in damages to be fortified by a bond or other security.  The applicant will need to prove that he is likely to be good for any damages that he may be required to pay on the cross-undertaking in damages.  It is important to deal with this issue in the affidavit in support, and to exhibit accounts etc. to evidence solvency.  There is a continuing obligation on the party who has obtained a freezing injunction to inform the respondent if there is a change in his financial status[38].
  19. Where it is later established that the injunction should not have been granted, the defendant will be entitled to damages under the cross-undertaking.  On an inquiry as to damages, the issue is whether the party can show that he has suffered loss, which should be determined on contractual principles[34].
References

[1] [1975] 2 Lloyd’s Report 509; [1980] 1 All ER 213
[2] [2007] UKHL 1
[3] Credit Suisse Fides Trust SA v Cuoghi [1997] 3 All ER 724
[4] Motorola Credit Corp v Uzan (No 2) [2003] All ER 150
[5] Mobil v Petroleos [2008] 1 Lloyd’s Rep 684; ETI Euro Telecom v Bolivia [2008] EWHC 1689; Belletti v MOrici [2009] EWHC 2316.
[6] [2007] UKHL 1
[7] [2006] 1 WLR 561
[8] Jet West Ltd v Haddican [1992] 1 WLR 487 at 490E
[9] Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334
[10] Banco Nacioncal de Comercio Exterior SNC v Empresa de Telecommunicaciones de Cuba SA [2007] ECWA Civ 662
[11] [2004] 1 WLR 113, CA
[12] [2008] 1 Lloyd’s Rep 684
[13] But see the decision in Van Uden regarding a recipient under the Brussels Regulation who was personally in the jurisdiction which justified the making of the order.
[14] [2008] EWHC 1689 (Comm)
[15] [2008] EWHC 2150
[16] [1983] 1 WLR 1412
[17] Thane Investments Ltd v Tomlinson [2003] EWCA Civ 1272 (Neuberger J)
[18] Mediterranean Feeders v Berndt Meyering Schiffarts (June 1997, unreported)
[19] See Lord Denning’s remarks about certain types of offshore company in Third Chandris Shipping Corporation v Unimarine.
[20] Stronger evidence of potential dissipation will be needed where the defendant is a long-established company with a reasonable market reputation than where little or nothing is known or can be ascertained about it.
[21] Pressurefast Ltd v Hall and Brushett Ltd, Court of Appeal Transcript No 336 of 1993
[22] The affidavit in support of the application must state why notice was not given (Practice Direction (Interim Injunctions) para. 3.4).
[23] Interoute Telecommunications (UK) Ltd v Fashion Gossip Ltd, The Times, 10 November 1999 (Lightman J)
[24] Mummery LJ in Memory Corporation Plc v Sidhu (No 2) [2000] 1 WLR 1443 at 1460
[25] [2007] UKHL 1
[26] Lennox Lewis v Eliades [2002] EWHC 335; & Early Red Corporation NV & Ors [2005] EWCA 525
[27] Armco Inc v NPV Ltd [1998] HKCFI 632
[28] O’Regan v Iambic Productions (1989) NLJ 1378
[29] Gill v Flightwise Travel Service Ltd [2003] EWHC 3082
[30] Rasu Maritime v Perusahaan Pertambangan [1978] Q.B. 644
[31] PCW (Underwriting) Agencies Ltd v Dixon [1983] 2 Lloyd’s Rep 197
[32] TDK Tape Distributor (UK) Ltd v Videochoice Ltd [1986] 1 WLR 141
[33] [1983] 2 All ER 158
[34] [1990] BCLC 38
[35] [2002] JLR
[36] [2004] EWHC 3103
[37] Sinclair Investment Holdings S.A. v Cushni [2004] EWHC 218
[38] Staines v Walsh [2003] All ER (D) 117
[39] Triodos Bank N. V. v Dobbs [2005] EWHC 108

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