Freezing orders: Recent key cases

22nd January 2018

In a recent issue of Banking Matters we published our practical guide to worldwide freezing injunctions:

Freezing orders: Significant tactical weapon

A freezing injunction or order is a remedy 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. If a respondent fails to comply with a freezer, it will be in contempt of court and can face a fine, imprisonment or seizure of assets.  They can therefore be a very significant tactical weapon in a claimant lender’s arsenal.

Often, freezing orders are obtained urgently, on an interim basis and without notice of the claimant’s application being given to the defendant/respondent. That is usually because giving notice would be tantamount to tipping off, which could give an untrustworthy respondent the time they need to place assets out of reach and render the freezer useless. However, because the respondent is absent and therefore unable to make representations at the initial hearing, the applicant and its legal advisors are 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/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.

In addition, and particularly where freezers are obtained on an interim/without notice basis, 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 applicant’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 injunction 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/applicant 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 to the overall litigation. Had he done so, the potential impact of a freezing injunction on the second defendant would have been understood and the interim injunction may not have been awarded.

Fourth, the draft freezing order sought by the claimant was not the standard-form freezing injunction, but that had not been drawn to the court’s attention.

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 injunction was therefore discharged.

Cost of a cross-undertaking in damages

The non-continuance of an interim freezing injunction and/or the dismissal at trial of the claims underlying the granting of the injunction can similarly have serious and significant consequences itself, but this time for the claimant/applicant.

For example, on an application for an interim injunction a claimant is required to provide what is known as a cross-undertaking in damages – that is, an undertaking to compensate the defendant if it is ultimately decided that the order should not have been awarded. Freezing orders are a particularly invasive and draconian remedy, which can put defendants to significant loss, cost and inconvenience. The undertaking in damages can therefore be very substantial and the claimant may, in some cases, also be required to provide security upfront.  In circumstances where an interim freezing injunction is discharged, the costs and compensation which the claimant could be required to pay to the defendant pursuant to the cross-undertaking could be considerable indeed.

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 injunction.

The freezing order in question, granted in 2005, prevented the defendant/respondent from entering into shipbuilding contracts (albeit the order did give the respondent 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 injunction.
• Once that party had established a prima facie case that its loss was caused by the injunction then (in the absence of material to displace it) the court was entitled to draw the inference of causation.
• In this particular 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.
• Like with other damages claims, it is open to the paying party to try to minimise the level of payout by alleging failure on the part of the receiving party to mitigate its loss.
• In this case, however, the failure to mitigate claim was dismissed because the defendant had faced the practical dilemma that it could not enter into shipbuilding contracts without the court’s permission, but without a concrete shipbuilding contract proposal it had nothing with which to convince a court that permission should be granted.

With 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 freezing order applicant/claimant who gets 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 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; 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.

The recent case of Koza Ltd & Anor v Akçil & Ors [4] also provides useful High Court guidance 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; and
• 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 claimant lenders, by their very nature, interim injunction applications are usually urgent and conducted in highly pressured and stressful situations. However there are significant legal and practical requirements and obligations with which applicants must comply – and failure to do so can be costly.

The best advice is to keep calm and to ensure that you have an expert team to quickly and confidently advise on, obtain and implement a freezing injunction for you.

________________

[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)