Freezing orders – recent developments impacting on international enforcement

Written on 7 Dec 2016

English law provides claimants and judgment creditors with a range of weapons to ensure that justice can be done and to preserve assets for enforcement.  One of the most powerful and draconian of these is the freezing injunction.  It can bind assets and parties worldwide, under threat of imprisonment if the terms of the order are breached, although it does not give the claimant any proprietary or security interest in the frozen assets.

Over the past few months, a string of cases has clarified the limits and risks, for both sides, of invoking this power, along with novel alternatives to the “nuclear option”.

Courts emphasise the long reach of freezing orders

Freezing orders can be continued indefinitely post-judgment

In Touton Far East v Shri Lal Mahal [2016] EWHC 1765 the judgment creditor had been trying, unsuccessfully, to enforce a judgment for six years.  The court found that the debtor had very substantial assets in India – where the judgment was unenforceable – but was simply choosing not to pay.

In those circumstances, the judge was prepared to allow the freezing order to stand indefinitely.  Previous case law had suggested that post-judgment injunctions should normally be of limited duration, but the judge in this case was prepared to take a robust view, noting that “[i]t is the policy of English law that English judgments should be paid.”

This shows the desire of the English court to send a clear message to parties who try to exploit technicalities to evade enforcement of English judgments.

European court supports enforcement of freezing orders against third parties in other EU countries

Meroni v Recoletos was a CJEU case concerning a freezing order granted in England against various individuals.  The claimant applied for the order to be recognised and enforced in the Latvian courts.  That application was resisted and ultimately appealed to the Latvian Supreme Court by a third party who was the representative and manager of the property that had been frozen.  He objected on the basis that he had not been a party to the proceedings, which he contended was contrary to principles of public policy under the EU Brussels Regulation.  The Latvian Court referred the question to the CJEU.

The CJEU held that it was not contrary to public policy to allow the order to be enforced.  It found that the court in which registration was sought could not review any findings of fact or law, and could not refuse to recognise or enforce a judgment from another EU state unless that would constitute “a manifest breach of a rule of law recognised as essential in the legal order of the Member State in which enforcement is sought…”

This case is significant in relation to the question of what effect a freezing injunction has on a third party outside the UK.  In general, freezing injunctions cannot themselves be enforced in foreign jurisdictions.  However, within the EU, freezing injunctions (and other interim orders) can be enforced directly and this case confirms that they will bind third parties in other EU countries (as well as being binding on the defendant/judgment debtor).  This point is clearly of significance to banks which are frequently notified of freezing injunctions.

For more on this case see our update here.

Continued focus on safeguards for defendants

While these recent cases reveal the desire of the courts to ensure that freezing orders are effective, other cases focus on the protections and safeguards for defendants that a fundamental to the court’s wide powers.

The cross-undertaking in damages can leave a claimant facing significant liability

A claimant applying for a freezing injunction will need to give a “cross-undertaking” to cover the damages that the defendant might suffer in having its assets frozen, if the order is later proven to be unjustified (for example if the claimant is ultimately unsuccessful in its claim).

In Fiona Trust v Privalov and others, this was precisely what happened.  The claimant obtained substantial freezing orders against the defendant, but at trial succeeded only to a very limited extent; far below the level of the assets frozen.

The defendants sought damages for the losses they suffered as a result of having their assets frozen.  The court granted damages; in doing so, the judge clarified that the court may take a “liberal approach” to assessing those damages in such circumstances.  This reflects the inherent imprecision in trying to assess what a defendant would have done with its assets had they not been frozen.  However, other cases have shown that a defendant who wants to claim compensation for losses resulting from a freezing order is best advised to notify the claimant of the likely losses in advance, to maximise the prospect of recovering full compensation.

Interpretation of injunctions: even minor errors can leave freezing orders unenforceable

In Haederle v Thomas, an un-corrected error which on the surface may seem relatively unimportant was sufficient to render a freezing order effectively unenforceable.

In this case, the claimant successfully applied for a freezing order over the defendant’s assets, up to £560,000.  However, in another section of the order, which was intended to allow the defendant to deal with his assets up to that amount, the amount was inadvertently left off the order.

The claimant subsequently brought committal proceedings on the basis of the defendant’s alleged non-compliance with the freezing order.  The defendant successfully defended those proceedings on the basis that the omission of the specified amount in one part of the order left the order insufficiently clear.

This emphasises the principle that an injunction must be absolutely clear in its terms.  Any ambiguity will tend to be construed in favour of a defendant who is being threatened with fines or imprisonment for breaching the injunction.  As a result, great care needs to be taken in ensuring that the wording of the injunction achieves precisely what is intended.  Often, because of all the focus on obtaining the injunction, claimants spend too little time focussing on the precise wording of the injunction.

What if you don’t have sufficient evidence to show a risk of dissipation of assets?

In light of the legal tests required to be satisfied in order to obtain a freezing order, and the risks discussed of getting it wrong, in some situations it makes sense to apply for an order which is less severe than a freezing order.  The courts have given guidance on alternatives in two recent cases.

Order to provide information about assets

Where a freezing order is being considered, but there is a lack of clarity around the assets that may be subject to the freezing order, one lesser-used alternative is to seek an order directing another party to provide information about their assets (under CPR 25.1(1)(g)).

In Gerald Metals v Timis [2016] EWHC 2136, the claimant made such an application, seeking clarity over the scope of certain assets that were being held in trust.  The claimant needed this information in order to decide whether or not to apply for a freezing order.

The court confirmed that it was possible to use this method as a first step (as opposed to obtaining the information at a later stage, for the purposes of enforcement).  The threshold to be satisfied to obtain such an order was lower than that to obtain a freezing order.  It was only necessary to show that there was a reasonable prospect of an application for a freezing order.  Importantly, the court confirmed that there was no need to show a “real risk” that the assets would be dissipated (a requirement to obtain a freezing order).

Nevertheless, in many instances, applying for information before applying for a freezing injunction could be a very risky step.  The prior notification could lead to the defendant dissipating their assets before a freezing order could be obtained.

Notification order

Another alternative to a freezing order which has been considered recently by the courts is a notification order.  In Holyoake & Others v Candy & Others, the claimant sought an order which required the defendant to give the claimant advance notice before disposing of any assets.

The High Court held that it did have jurisdiction to make such an order (under section 37 of the Senior Courts Act 1981).  It found that the test for granting such an order was more stringent than the standard American Cyanimide test for an injunction, and was instead similar to that for a freezing order, being that:

  • the claimant had a “good arguable case” (rather than simply that there was a “serious issue to be tried”);
  • there was a risk of dissipation of the assets; and
  • the “balance of convenience” favoured granting the injunction.

The court found that these tests were satisfied.  However, the order that it granted was on the basis of a less invasive proposal that the claimants had put forward during trial: that where the disposition of UK assets were concerned, the defendant only had to notify the claimant within three days of that disposition.  At a return hearing, this was modified further, so that dispositions within the usual course of business did not need to be notified at all.

For some, an order requiring prior notification before disposing of assets will give them the comfort they need, allowing them the opportunity to apply for a freezing order if a proposed disposition causes serious concern.  The court confirmed that it would still be appropriate for the claimant to provide a cross-undertaking in damages, but the amount would be less than for a freezing order, reflecting the lower potential for the defendant to suffer loss.

This case does not change the law significantly.  However, it does show how the courts must consider the balance of prejudice that might be caused to both sides by a decision to grant, or not grant, the injunction.  In broad terms, this means that if you reduce the impact of the order on the defendant, the court is more likely to grant the injunction.

Where does this leave claimants?

The English courts have demonstrated time and again their commitment to the principle that the courts must assist claimants in ensuring that judgment debts are paid.  With extra-territorial reach and potentially indefinite application, freezing orders will continue to be one of the most powerful weapons available to claimants (along with receivership orders) to tackle evasive defendants.

However, the threshold for obtaining a freezing order is relatively high, as are the stakes involved.  Where there is any doubt as to whether a freezing order is the right approach, it is always worth considering how the normal form of injunction can be watered down in order to reduce the impact on the defendant and, hopefully, increase the prospect of the injunction being granted.