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Freezing Orders and Notification Injunctions: The Courts’ Discretion and Jurisdiction

Solicitors and legal professionals should be well aware of this area of law because of its draconian nature. No matter what the client’s position is, whether looking to obtain a freezing order or facing one, these measures are extremely onerous for all parties involved. It is therefore important to be aware of all relevant considerations and attempt to accurately predict what the Court may or may not through the case law.

Freezing Orders

A freezing order or a freezing injunction is simply a special type of court order, which prevents a party to proceedings from disposing of or dealing with its assets. It is an equitable remedy but the Court’s jurisdiction to grant injunctive relief is derived from s. 37 Senior Courts Act 1981 (‘SCA 1981’) which confers to the Court an unlimited power to exercise its discretion when it is just and convenient to do so. The aim of such orders is usually to preserve the Defendant’s assets until the final judgment is enforced without receiving any security over the assets.

Freezing orders can be domestic or worldwide and may be obtained against all types of assets over which a judgment can be attached such as bank accounts, shares, vehicles and land. These include assets, which are beneficially held by the Defendant or as a nominee or trustee. Freezing orders may even be obtained against non-parties if the assets although not legally owned by the Defendant are actually owned and controlled by them (TSB Private Bank International SA v Chabra [1992] 1 W.L.R. 231). The most common type of freezing order is a maximum sum order, which is limited to the claim value plus interest and costs. Other types of freezing orders such as a general order over all assets or an order over specific high value assets are less common.

Procedure under Civil Procedure Rule (‘CPR’) 25

The general procedure is set out in CPR 25 and Practice Direction (‘PD’) 25A. An application must be made in the usual way to either the County Court or High Court, typically without notice to the respondent. This must be accompanies by an affidavit with evidence in support of a freezing order being granted (PD 25A.3.1). It should be noted that the applicant owes an on-going duty of full and frank disclosure and must therefore disclose all material facts. A draft order must be prepared following the standard form found in PD 25A or Appendix 5 of the Commercial Court Guide and any differences from the standard form must be disclosed. If the freezing order is granted at a without notice hearing, it will only be valid for a certain period until a return date is set for a full hearing with the respondent present. The applicant should serve the freezing order on the respondent and any third parties that hold or are believed to hold assets of the respondent. The Court will then decide at the full hearing whether the injunction is to be continued, varied or discharged.

Requirements

The Court will weigh the damage caused to the respondent against the benefit to the applicant, who is required to act reasonably and diligently. The applicant must bring their application swiftly as a delay will make it difficult to convince the Court and assets may already have been dissipated. The Court will ask whether it is just and convenient to grant a freezing order (s. 37 SCA 1981) provided that the following 6 conditions established by case law are satisfied:

  1. The applicant must have a cause of action, or counterclaim, through an underlying legal or equitable right;
  2. The English Court must have jurisdiction;
  3. The applicant must have a good arguable case;
  4. There must be assets in existence;
  5. There must be a risk of dissipation; and
  6. The applicant must provide an undertaking in damages.

Undertaking in Damages or Cross-undertaking

The applicant must give an undertaking to the Court to provide compensation to the respondent for any loss suffered if it is later determined that the injunction should not have been granted and the applicant loses at trial. The undertaking also extends to damage suffered by any other party as a result of the injunction and seeks to protect their position until judgment. The applicant may be asked to provide security by way of a payment into Court to fortify the undertaking or an undertaking from a party that is more financially secure than the applicant.

Post-judgment

Freezing orders are generally considered to be granted more readily at the post-judgment stage and may be obtained to preserve the respondent’s assets until the judgment can be enforced (Chen & Ors v Chui & Ors (Rev 1) [2011] EWHC 1276 (Ch)). The Court recently held that a post-judgment freezing order may continue indefinitely until payment of the debt or a further order in circumstances where the respondent could pay at any point but chose not to (Touton Far East Pte Ltd v Shri Lal Mahal Ltd (formerly Shivnath Rai Harnarain (India) Ltd) [2016] EWHC 1765 (Comm)). Some further clarification in relation to post-judgment freezing orders may be found in the case of Nomihold Securities Inc v Mobile Telesystems Finance SA [2012] EWHC 130 (Comm). The Court explained that cross-undertakings in damages should be given in an application for a post-judgment freezing order but should be unfortified and that post-judgment freezing orders do not allow interference in ordinary commercial transactions unless there is some element of impropriety.

Notification Orders

A notification order or notification injunction is a less intrusive form of freezing order, which require a respondent to notify an applicant if they intend on disposing of an asset over an agreed value. In Holyoake & Anor v Candy & Ors [2016] EWHC 970 (Ch) the High Court confirmed that s. 37 SCA 1981 also gives the Court jurisdiction to grant an order requiring a respondent to give notice of any disposals of or dealings with assets even when a freezing order is not sought. This case was subsequently appealed and the Court of Appeal clarified that a notification order is a modified version of a freezing order so the test to establish the risk of dissipation is the same as for a freezing order application.

Risk of Dissipation

As a general rule, for the risk of dissipation to be sufficient, the applicant must prove that there is a real risk that the judgment will not be satisfied because without an injunction the respondent will dissipate its assets in ways other than the ordinary course of business or assets will be dealt with in a way which will make judgment enforcement difficult (Congentra AG v Sixteen Thirteen Marine SA [2008] EWHC 1615 (Comm)).

The test is objective and the Court must take into account all relevant circumstances. Some relevant factors which are non-exhaustively considered are how easily assets can be moved, if overseas how easily judgment can be enforced, the nature and financial standing of the respondent, the domicile of the respondent’s business, the respondent’s credit record, any previous defaults and any fraudulent failure to disclose asset or other evidence of dishonesty.

Holyoake v Candy

In Holyoake & Anor v Candy & Ors [2016] EWHC 970 (Ch) the Claimant, Mark Holyoake and his company, asked for a £12 million loan from one of the Defendants for the purpose of purchasing and developing a property in 2011. Following a series of events, the Claimant claimed that the Defendants plotted a conspiracy against him but subsequently entered into a Settlement Deed in 2013. The Claimant issued proceedings claiming misrepresentation, duress, intimidation, extortion and blackmail as he was forced to sell the property at a loss in order to repay more than £37 million which was due under the loan. The Defendants argued that any potential claim was settled by the Settlement Deed and in any event the Claimant had breached the terms of the loan agreement.

The Claimant sought an interim injunction to prevent the Defendants from disposing of assets over the value of £1 million – which later became £5 million – without giving the Claimant’s solicitors 7 days notice. The High Court imposed a temporary injunction so that the Defendants were required to give notice within 3 days after a transaction. The High Court judge also held that the court had jurisdiction, the relevant test was whether the Claimant had a good arguable case which was established on the facts and the risk of dissipation which involved a more lenient test than the one used for freezing orders.

On appeal (Holyoake v Candy [2017] EWCA Civ 92) Lady Justice Gloster overturned the decision. The importance of her decision is two-fold. Firstly, she clarified that a notification injunction is a modified version of a freezing order and not a distinct type of injunction. Therefore, the test used for dissipation of assets in relation to freezing orders should also be used for notification orders. Secondly, she conducted a thorough analysis of the factors to be taken into account in establishing the risk of dissipation. This analysis is tailored to the facts of this case but the reasoning behind it is transferrable and can be applied to a variety of situations.

Risk of Dissipation Test

The starting point is s. 37 SCA 1981 with the ultimate question being whether it is just and convenient to grant a conventional freezing order. In paragraph 34 of her judgment she acknowledges that there has been some debate on the correct test but the threshold in relation to freezing orders is well established. She confirms that there must be a real risk, judged objectively, that a future judgment would not be met because of unjustifiable dissipation of assets. Solid evidence is required to satisfy this risk, which will vary depending on the individual circumstances. Lady Justice Gloster rejected the Claimant’s argument that a lower threshold should be used because a notification order is less onerous for 3 reasons (paragraphs 40-42). Firstly, she emphasized the need to maintain the close regulation of the availability of injunctions as they have the nuclear effect of prohibiting a party of dealing with its assets. Secondly, if the Claimant’s case is logically construed it would suggest that there is a spectrum of the level of risk of dissipation but the solution is to have a binary threshold and not a sliding scale. Thirdly, in any event the test, if not a binary threshold, would need careful exposition to be workable.

Application of the Test

On the facts there was not sufficient evidence to demonstrate the requisite risk of dissipation. The burden is on the applicant to satisfy the threshold by adducing sufficient evidence in support. Unless the applicant has raised a prima facie case to support a freezing order, the respondent is not obliged to provide any explanation or answer any questions asked. The requisite risk of dissipation must be established against each respondent and therefore, alleging that parties are co-conspirators does not mean that evidence established for one transposes to others.

Lady Justice Gloster conducted her own analysis of the evidential factors scrutinising the High Court’s approach:

  1. Transfer of property from one of the Defendant’s to his wife

The judge held that this can prima facie provide some support for risk of dissipation but on the facts there was minimal support. Lack of evidence from the Claimant does not mean that the burden should fall on the Defendants to explain their action.

  1. Apparent disconnect between one of the Defendant’s wealth and lifestyle

This was of minimal support and the High Court judge wrongly shifted the burden from the Claimant to the Defendants. The Claimant had no prima facie evidence to support this assertion, which was solely based on the fact that he could not understand how one of the Defendants could afford their luxurious lifestyle. It could however have been from different sources which he was not obliged to disclose to the Claimant and it is therefore dangerous to reply on this factor as evidence of risk of dissipation.

  1. Corporate structure of the Defendants’ companies and corporate re-organisation in 2014-2015

The Defendants’ links to complex and offshore corporate structures and the potential of transferring value rapidly and invisibly through corporate re-organisation could contribute to the risk of dissipation. However, the judge held that a mere possibility is not enough to justify this potential, which is for the Claimant to prove, otherwise the burden of proof would be reversed.

  1. The allegations against the Defendants in the substantive claim

The Claimant established a good arguable case in relation to the Defendants’ appalling conduct which could be taken into account in evaluating the risk of dissipation but the evidence put forward was not sufficiently strong. The judge referred to the test in of VTB Capital plc v Nutritek International Corp [2013] UKSC 5 where it was highlighted that the Courts should scrutinise whether what is alleged in relation to good arguable case really justifies the inference of risk of dissipation.

  1. The stable door point

The Defendants argued that if they were really minded on dissipating their assets they would have already done so and there was therefore no real risk of them doing so in the future. The High Court judge held that this did not mean that there is no risk of them seeking to do so at a later stage closer to trial especially if it seemed more likely that they would lose. Lady Justice Gloster explained that this was a powerful factor against any conclusion of risk of dissipation as on the facts any risk would have materialised by this point.

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