Exclusion clauses in freezing orders

While the movement of people is restricted by the Coronavirus pandemic, it remains relatively easy (often at the touch of a button) for people to move their assets around. In the vast majority of financial cases dealt with by family law practitioners, this is little cause for concern; assurances or undertakings given at the outset of the case as to the preservation of assets, coupled with the duty to provide full and frank disclosure, will usually suffice and often at least some of the assets will be in joint names. However, in a minority of cases where there is a real risk of assets being dissipated, or placed beyond the court’s reach, practitioners should be alive to the scope of protective measures they can seek from the court. Taking immediate action may be necessary.

Freezing orders are one such measure. A freezing order is an interim injunction that restrains a party from disposing of or dealing with their assets. In financial remedy cases either party may successfully apply for a freezing order (pursuant to s37(2) of the Matrimonial Causes Act 1973) where they can demonstrate a good arguable case, by reference to clear evidence, that there is a real risk of dissipation of assets, such that a judgment as to the overall division of assets would go unsatisfied. Freezing orders may attach to all types of assets, including bank accounts, shares, land and chattels, whether located within or outside of the jurisdiction. They are therefore a potent tool in an appropriate case.

Because of the severe effect a freezing order may have on a respondent, the courts have increasingly sought to regulate the process for seeking and making such orders. Family practitioners will be aware of the decision of UL v BK (Freezing orders: Safeguards: Standard examples) [2013] EWHC 1735 (Fam), in which Mostyn J set out the principles and safeguards that apply to this form of injunctive relief.

One such safeguard is the inclusion of an “exceptions” clause in the terms of the order – a clause which identifies the circumstances in which the respondent can have recourse to the frozen assets without breaching the order; for example, to meet expenses incurred in the ordinary course of business or living and legal expenses. In doing so, the order seeks to strike a balance between the preservation of assets that may be dissipated on the one hand, and the rights and freedoms of the respondent on the other.

The extent to which a respondent is able to use “frozen assets” pursuant to an exceptions clause was looked at in the recent cases of Crowther v Crowther [2020] EWCA Civ 762 and Moutreuil v Andreewitch (Contempt No 2) [2020] EWHC 1301 (Fam).

In Crowther the wife sought on appeal to reinstate a freezing order that had been discharged by Holman J (although it remained in place pending the outcome of the appeal). The original freezing order, granted by Lieven J, prohibited the husband and a number of third parties – Mr Knight and some companies controlled by him – from disposing of or charging four vessels (and the proceeds of sale of a fifth vessel). This was on the basis of W’s case that whilst Mr Knight was the legal owner of the vessels, she owned the beneficial interest with H, with whom she had previously ran a shipping business.

The freezing order made by Lieven J explicitly did not prevent Mr Knight (or his companies) from operating business as usual. By the time the case came before the Court of Appeal, Mr Knight’s position was that he urgently needed to sell one of the ships to meet, for example, running costs of the other ships, estimated at $115,000 per month. Without access to sufficient funds, Mr Knight said that the company which owned the vessels would be forced out of business in a matter of weeks.

In recognition of this, whilst reinstating the freezing order made against Mr Knight and his companies, thereby allowing W’s appeal, the Court of Appeal extended the scope of the exceptions clause. In particular, the order was varied to permit the disposal of the vessels, or for them to be charged as security for a loan, provided that the net proceeds of sale/charge were used to pay the running costs of the remaining vessels so as to render them suitable for chartering. In recalling the limitations of a freezing order, Males LJ, who gave the leading judgment, noted that “the purpose of a freezing order is not to provide a claimant with security or to prevent a defendant from carrying on business in the ordinary course”.

Males LJ also concluded that it would not be appropriate for Mr Knight to require W’s approval in advance of incurring expenditure when using the frozen assets. Instead, the judge directed that proper records of expenditure should be kept and made available to W’s solicitors.

In Moutreuil v Andreewitch (Contempt No 2) [2020] EWHC 1301 (Fam), which involved an unmarried couple (and hence the section 37(2) Matrimonial Causes Act 1973 procedure did not apply), Cobb J considered whether there had been a breach of a freezing order that restrained the respondent, Mr Andreewitch, from disposing of or dealing with the income or assets of a company, Pier Investment Company Ltd (Pier), of which he was the sole director and Mrs Moutreuil was the sole shareholder.

The original freezing order made by deputy district judge Hodson in March 2019 froze the income and assets of Pier “except insofar as is necessary for  the company to meet its tax or other liabilities”.

In November 2019 a further order required Mr Andreewitch to produce the company bank statements. These showed that he had used the company bank account to make payments amounting to over £25,000 in respect of his personal living expenses and legal fees, some £18,000 of which post-dated the freezing order. Mr Andreewitch did not dispute that he had caused the company to make the payments but claimed that they were made in respect of the company’s liabilities, namely in paying him a salary, in repaying loans he said he had made to the company, and in discharging the company’s alleged liability for legal fees.

Applying the criminal standard of proof, and in finding that Mr Andreewitch’s evidence was contrived and disingenuous, Cobb J was satisfied that:

1. Mr Andreewitch had breached the freezing order by making/procuring the transfers/payments out of the company bank account; and
2. such breaches were deliberate.

As to the construction of the exceptions clause, Cobb J did not agree with the position advanced at the hearing on behalf of Mr Andreewitch that the wording of the clause was unfortunate, in that it permitted a wide discretion to the person operating the company account, with no restrictions on the nature of the “other liabilities”. In the judge’s view, the terms of the freezing order were clear and unambiguous.

These two cases are a useful illustration of the principles by which exclusion clauses are constructed by the courts. To this extent, there is a message for both parties.

For the applicant, it is important to bear in mind that the court will seek to balance the need for a freezing order against the infringement of the respondent’s rights in making the order sought. Where the making of a freezing order has a potentially onerous effect on the respondent, consideration will need to be given to the terms on which the respondent could have recourse to the frozen assets. For example, as in Crowther, this might involve the sale of a frozen asset in order to keep a company afloat. The applicant should also be aware that when a freezing order is sought, unless the court orders otherwise, they must undertake to the court to pay any damages which the respondent sustains which the court considers the applicant should pay (FPR PD 20A, para 5.1(a)).

For the respondent, great care should be taken when seeking to rely on an exclusions clause to have recourse to assets which are otherwise frozen. The court is likely to construe such a clause narrowly. Particular consideration will therefore need to be given to the scope of the clause when negotiating the terms of the order. In the majority of cases, the standard form of freezing order is likely to be used, which should help to limit any potential areas of dispute. Where the wording of the exceptions clause is unclear, it may assist a respondent to make an early application to vary the freezing order, rather than wait until after the order has already potentially been breached.

The nuances around weighing up the competing interests of the parties makes the use of freezing orders fertile ground for protracted and expensive litigation.

The importance of a carefully worded exclusions clause should not be overlooked.

This article was first published in Resolution’s The Review, Issue 209.