Freezing Orders: Policing the Nuclear Option
Lord Justice Donaldson memorably described freezing orders as one of the law’s ‘nuclear‘ weapons in Bank Mellat v Nikpour  FSR 87. It follows that access to such a weapon in the court’s arsenal is strictly policed, subject to a number of checks and balances that govern the licensing of its use. A run of recent cases has developed the jurisprudence in this area, the practical implications of which are considered in this two-part article.
Distinguishing the relief sought
In the first instance, it is important to distinguish general freezing orders from:
(1) orders sought to preserve the subject matter of a claim where the applicant has a proprietary or tracing claim (proprietary injunctions); and
(2) notification orders.
Although each represents a form of a freezing order, the conditions governing access to and deployment of the three forms of relief will vary.
For a proprietary injunction:
- It attaches only to assets which arguably belong to the applicant, rather than a freezing order which will restrain the respondent’s assets generally.
- The applicant must establish an arguable case (a serious issue to be tried) and the court will then apply the balance of convenience test and determine whether it is just and convenient to grant the injunction. For freezing orders, the applicant must satisfy the court that it has a good arguable case and that there is a real risk of dissipation.
- The respondent is usually required to use its own assets to meet living and legal expenses and will need to apply for permission to vary a proprietary injunction to meet these expenses. In contrast, under a freezing order, there is ordinarily a carve-out for reasonable legal and living expenses to be drawn on the frozen assets.
- The applicant will be given priority over a respondent’s creditors if the respondent becomes insolvent. This differs from a freezing order (as explored further in Part 2 of this article), which does not give an applicant such priority.
Notification orders, meanwhile, are a type of order that restrains the respondent from disposing, dealing or otherwise engaging in transactions with their assets without first giving the claimant’s solicitors advance notice. In Holyoake and another v Candy and others  EWCA Civ 92, the Court of Appeal held that this is a modified form of a freezing order, rather than a distinct type of injunction, and so the same risk of dissipation test should be applied as for conventional freezing orders. Prior to this ruling, it may have been thought that a notification order, being less onerous than a freezing order, would be easier to obtain, but the Court of Appeal’s judgment puts that in doubt.
That said, the damages payable by an unsuccessful claimant following the discharge of a notification order are likely to be lower than if the respondent’s assets had been frozen, and so the cross-undertaking in damages is likely to be more modest. Further, a modest notification order limited to a specific asset or group of assets may lower the threshold for the claimant as to the tests (including risk of dissipation) the court will apply.
Risk of dissipation
One of the primary checks on freezing orders is the requirement that the applicant satisfies the court of a real risk of dissipation by the respondent. Frequently, this perceived risk will be the trigger for the application in the first place, and highlights the core purpose of freezing orders: there is a real risk that a judgment or award will go unsatisfied and that enforcement will be thwarted unless the respondent is restrained from dealing with their assets other than in the ordinary course of business. It is worth noting that this is not about establishing the dishonesty of the respondent and, while dishonesty can go towards evidence of the risk, it may not be determinative on its own.
The precise scope of the test that the applicant must satisfy was scrutinised by the Court of Appeal in the recent case of Les Ambassadeurs Club Ltd v Yu  EWCA Civ 1310. The court held that:
- A risk of dissipation will not necessarily be inferred more readily in a post-judgment case. It is a question of the evidence put before the court to establish a real risk in this regard. This is notable since, prior to this decision, jurisprudence (dating back to Distributori Automatici Italia SpA v Holford General Trading Co Ltd  3 All ER 750 but also, shortly before the Court of Appeal’s decision, in Griffin Underwriting Ltd v Verouxakis  EWHC 226 (Comm)) inclined to the view that an unsatisfied judgment could make it easier to infer a risk of dissipation.
- A distinction must be made between a defendant who could pay their debts but will only do so if forced, and one determined not to pay such that they would take steps to frustrate recovery. Having the mere opportunity to take such steps is not sufficient and cogent evidence of a real risk is required.
- ‘Real’ means ‘more than fanciful’, but the courts should not embark on a comparative exercise of what is real and what is fanciful.
The decision underlines the importance of robust evidence being put before the court. Here, a number of factors favoured a risk of dissipation: the respondent had not engaged with the proceedings; had repeatedly failed to make payment; was not domiciled in England and had limited assets in the jurisdiction; and had access to offshore structures if he wanted to move money out of reach. But at the same time, there was no evidence that he had used his offshore arrangements fraudulently or sought to move money as a result of the default judgment obtained by the claimant. He had also paid off some of the debt previously. The Court of Appeal was unpersuaded that this was a case where the respondent would take steps to frustrate enforcement of a judgment.
Disclosure: how full & how frank?
Another key check at the point of making the application is the requirement for the applicant to provide full and frank disclosure. But what does this mean?
An application made without notice to the respondent, which a freezing order invariably will be given the circumstances, places on the applicant a duty to make full and frank disclosure. This means disclosing all matters that are material to the court in deciding whether to grant the order and, if so, on what terms. Critically, this includes any matters that are adverse to the applicant and that are known or should have been known through reasonable enquiry.
The duty should not be underestimated. The likely urgency and time pressure of the situation is unlikely to relieve an applicant in any way, as the Court of Appeal emphasised in Deutsche Bank (Suisse) SA v Khan  EWCA Civ 1149. Case law lays bare the consequences of a failure to satisfy the duty. In Fimbank Plc v Discover Investment Corp  EWHC 254 (Comm),  All ER (D) 129 (Feb), the Commercial Court discharged a freezing order obtained ex parte in support of arbitration on the basis that the claimant had no good arguable case on the merits. The court heavily criticised the claimant’s failure to offer full and frank disclosure of facts relevant to the claimant’s intended substantive claim and to the risk of asset dissipation, noting that such was the failure that, even if there had been a good arguable case, the freezing order would have fallen to be discharged.
At the same time, the extent of the duty should perhaps not be overstated. ‘Full’ does not mean exhaustive. The applicant is not required to anticipate or provide detailed analysis of every single point that could be raised by the respondent, as highlighted in a pair of cases from 2016: Iiyama (UK) Ltd v Samsung Electronics Co  EWHC 1980 (Ch) and National Bank Trust v Yurov and others  EWHC 1991 (Comm). The court will take an evaluative approach to any omission. This was demonstrated in Caring Together Ltd (in liquidation) v Bauso  EWHC 2345 (Ch),  All ER (D) 167 (Jul), where the applicant was found to have failed to have disclosed three items that should have been disclosed, but these were ‘non-critical’. There had been a ‘serious and sustained process of frank disclosure’ in the evidence filed in support of the application and orally at the hearing. However, the applicant’s non-disclosure was not sufficient grounds for not continuing the order. The court noted that any prejudice occasioned to the respondents could be dealt with by an amendment to the freezing order rather than by the ‘draconian remedy’ of its discharge.
The standard carve-outs
When it comes to formulating the order, standard provision is usually made for carve-outs for the respondent’s ordinary living expenses, reasonable sums for legal advice and representation and the dealing with or disposal of any of its assets in the ordinary and proper course of business. These are reflected in the terms of the standard order annexed to Practice Direction 25A of the Civil Procedure Rules, as well as that included in an appendix to the Commercial Court Guide.
These exceptions are designed to stop a freezing order operating oppressively. A number of recent cases have considered their scope. To take three examples from the Court of Appeal:
- In Vneshprombank LLC v Bedzhamov and others  EWCA Civ 1992,  1 All ER (Comm) 911, the defendant had been permitted to spend £80,000 per month for living expenses and was seeking an increase to £310,000. The Court of Appeal held that on the facts of the case, this was appropriate. It highlighted that the central purpose of freezing orders was to prevent defendants taking steps outside the ordinary course which would render any judgment unenforceable. Beyond this, defendants should be entitled to do as they wished with their own money, with the court reiterating the importance that freezing orders do not operate oppressively.
- In Koza Ltd and another v Akcil and others  EWCA Civ 891,  1 All ER (Comm) 301, the Court of Appeal noted how case-specific any analysis must be, but did set out some key principles. These include that the test is objective; the question for the court is not whether the transaction is ordinary or proper, but whether it is carried out in the ordinary and proper course of the company’s business; and that ‘proper course of business’ meant that the course of business ‘must be in accordance with acceptable standards of commercial behaviour in conducting that business’.
- In Organic Grape Spirit Ltd v Nueva IQT, SL  EWCA Civ 999, Organic Grape was subject to a freezing order and seeking to pursue a start-up business. The question for the court was whether this was permitted under the ‘ordinary and proper course of business’ exception. At first instance, it was held that it was not. The Court of Appeal, however, reversed this decision, holding that a transaction or business should not be prohibited purely because it involved risk or speculation, provided the company was acting in good faith. While this may be seen as a generous move by the Court of Appeal, it should be noted that a respondent like Organic Grape, without a pattern of trading, could not simply rely on the exception but, the court said, had to specifically ask the court to authorise pursuit of its fledgling business.
A distinction has also been drawn by the courts between pre- and post-judgment freezing orders when it comes to the ordinary course of business exception. In Emmott v Michael Wilson & Partners Ltd  EWHC 2498 (Comm), the court reviewed the authorities and set out what it regarded as the ‘abundantly obvious’ principle that, once judgment has been given, it is not appropriate to have the exception in the freezing order. The one exception to this was where its continuance would aid execution of the judgment by allowing further monies to be brought in in circumstances where they otherwise might not.
It should also be borne in mind that a freezing order may comprise both general freezing and proprietary elements, which in turn may influence the scope of the assets falling within the exceptions (that is, not those subject to the proprietary aspect of the order).
Finally, the enthusiasm of any applicant seeking to impose tight restrictions on the respondent should be tempered by the knowledge that the court will almost certainly require a cross-undertaking in damages from the applicant—that is, the applicant must undertake to the court to compensate the respondent if it is subsequently determined that the applicant was not entitled to the relief granted by the court. The losses that may be claimed by the respondent can include damages for loss of business, and one can see how these may be exacerbated if the ordinary course of business exception is drawn too narrowly, subject to the usual principles of causation, remoteness and mitigation, as confirmed by the Court of Appeal in Hone v Abbey  EWCA Civ 711,  All ER (D) 64 (Jun).
This latter point illustrates one of the potential traps that the unwary (or perhaps over-zealous) applicant may fall into at the point of drafting the order.
Part 2 of this article will go on to consider further potential drafting traps.
You can find Part 2 here.
This article was first published in New Law Journal, www.newlawjournal.co.uk