Freezing Orders: Policing the Nuclear Option (PT 2)

Part 1 of this article considered some of the checks and balances that apply when seeking access to one of the law’s most potent weapons, including the tests the applicant must satisfy, and exceptions that are commonly included in the order made by the court (see ‘Freezing orders: policing the nuclear option (Pt 1)’, NLJ, 7 & 14 January 2022, p15).

Part 2 of this article goes on to look at the impact these checks and balances have when it comes to drafting and construing the terms of the order, as well as the extent to which the applicant may make use of information disclosed by the respondent. It concludes by considering the issue in the context of the three specific areas: insolvency, criminal proceedings and the rapidly developing area of cryptocurrency.

Bear traps when drafting

Given the draconian nature of freezing orders, the courts will take a strict approach to construing the terms of the order. This was confirmed by the Supreme Court in JSC BTA Bank v Ablyazov [2015] UKSC 64, [2015] All ER (D) 175 (Oct) when considering whether: (1) the proceeds of loan agreements; and (2) draw-down of those agreements fell within the meaning of ‘assets’ referenced in the order. The court acknowledged that it ‘must be agile in this game of cat and mouse between claimants and defendants to make sure that it is making new orders to meet new avoidance measures’. However, this did not justify an expansive interpretation of the order which had already been made in the case. As a result, the proceeds were held to be within scope, while the respondent’s right to draw down was not.

In Ablyazov, the court was dealing with the Commercial Court standard form of freezing order. This contains provision for wider wording (to be considered on a case-by-case basis) than the standard form annexed to PD 25A to include the respondent’s assets whether they are interested in them legally, beneficially or otherwise. In JSC BTA Bank v Kythreotis [2010] EWCA Civ 1436, [2010] All ER (D) 163 (Dec), the Court of Appeal confirmed that assets held by a respondent as a trustee or nominee for a third party would be included in this wording. While this offers potentially greater scope for an applicant, they should be mindful that, if seeking the inclusion of this wording (on the basis there are proper grounds for believing that assets ostensibly held by the respondent on trust or as a nominee for a third party in fact belong to the respondent), this may well result in an extension of the cross-undertaking in damages to cover any purported beneficiary for loss caused by an injunction which is subsequently varied or discharged in respect of, for example, trust assets—a point highlighted by the Court of Appeal in Kythreotis.

Meanwhile, the strict approach to construction means that the applicant must be astute with their drafting to ensure that the order operates as intended. In Haederle v Thomas [2016] EWHC 1866 (Ch), [2016] All ER (D) 137 (Jul), an uncorrected error in a worldwide freezing order substantially invalidated committal proceedings. The order had been intended to permit the respondent to deal with their non-English assets, provided that the total unencumbered value of all their assets, wherever situated, exceeded £560,000. However, that figure was omitted when the order was sealed, and the error went unnoticed at the return date. The respondent argued that, read literally, the order left them free to dispose of their non-English assets and that, further, when construed as a whole, the order was unclear in a critical respect.

The court held that an injunction, especially one to be enforced by committal, had to be clear and precise. There was no escape from concluding that the order was materially unclear and uncertain. Accordingly, however undeserving the respondent’s conduct might seem, they should not be at risk of imprisonment or a fine in respect of dealings with their non-English assets.

Ancillary disclosure

The courts have broad powers when it comes to making ancillary disclosure orders. The disclosure of details of assets held by a respondent is crucial to the effectiveness of a freezing order. An affidavit by the respondent setting out the nature, value and location of their assets (potentially with a de minimis limit) will likely be required. The courts have made it clear that disclosure means full, not selective, disclosure by the respondent in order to give the order bite. The importance of this was underlined by the Commercial Court in PJSC Tatneft v Bogolyubov and others [2018] EWHC 1314 (Comm), rejecting any notion of a ‘cherry picker’s charter’ and that anything less than full disclosure would effectively put the order in the control of the defendant.

One issue that has been examined recently by the courts is the extent to which the applicant may make use of this information.

In JSC Commercial Bank Privatbank v Kolomoisky and others [2021] EWHC 1910 (Ch), a confidentiality club had been imposed on the claimant in relation to disclosure required from the first and second defendants under a worldwide freezing order. This provided that the disclosure would be limited to the claimant’s English solicitors and not shared with their client. The basis for this was that the disclosure related to Ukrainian and Russian assets and the defendants were concerned that the disclosure would be leaked to the Ukrainian president and Russian state and be used to seize their assets or damage their business.

The court set aside the confidentiality club order, noting, among other things, the significant difficulties it created for the claimant’s solicitors in conducting the proceedings, and the interference with the claimant’s right to participate in the conduct of its own case. The court acknowledged that a real risk of harm to the defendants could outweigh such factors, but that had not been established on the evidence, and the safeguard provided by CPR 31.22 (which restricts the use of documents disclosed in proceedings to those proceedings absent court permission otherwise) was adequate.

The appetite of the courts to assist claimants where justice demands a relaxation of restrictions around disclosure was also illustrated in National Bank Trust (a company incorporated in Russia) v Yurov and others [2020] EWHC 757 (Comm). Judgment had been handed down in proceedings where three majority shareholders and supervisory board members of a Russian bank had been found liable for a massive fraud over many years by procuring the bank to ‘loan’ around US$1bn to their own companies. Among the consequential matters being ruled on by the court was an application by the claimant bank to be released from its undertaking in a worldwide freezing order obtained against the defendants up to trial in order that it may use information obtained under compulsion of that order to enforce the judgment.

The court held that an applicant must establish special circumstances constituting cogent and persuasive reasons for permitting collateral use of disclosure, that it would not occasion injustice to the disclosing party and whether it would be in the public interest. Here, it was ‘strongly in the public interest’ for the disclosed material to be available for enforcement purposes post-judgment where there had been a finding of civil fraud, so that the perpetrators did not retain the benefits of their fraud. Civil proceedings were not an end in themselves; their end goal in fraud cases was for damages to be paid to the claimant.

Insolvency

A party seeking a freezing order must be appraised of the impact the insolvency of the respondent can have and the limits this can impose. A freezing order (distinct from a proprietary injunction) is not a form of security. This means that it does not provide any proprietary right over the assets frozen such that, if the respondent does become insolvent, the applicant will rank as an unsecured creditor. At the same time, a secured creditor will usually be able to enforce their security over assets that are subject to a freezing order without the need to apply to the court for permission or a variation of any freezing order.

Criminal proceedings

The civil courts’ power to freeze assets may be considered akin to the Crown Court’s power to make an order restraining a defendant’s property in criminal proceedings. The interaction between the two has been the subject of recent judicial scrutiny, in particular in determining whether the existence of a criminal restraint order (CRO) against the respondent should preclude the granting of a freezing order.

The Court of Appeal answered this question in the negative in AA and others v BB and another [2021] EWCA Civ 1017. The respondent had challenged the continuation of a worldwide freezing order on the basis that the assets within its ambit were already the subject of CROs sought by the Serious Fraud Office under the Proceeds of Crime Act 2002 (POCA 2002) and so there was no justification for the worldwide freezing order since there was no real risk of a dissipation of assets.

The court held that the existence of the CROs did not preclude the grant of worldwide freezing orders. A real risk of dissipation remained, the court said, because at any point the CRO proceedings could be abandoned or varied, leaving the claimant without any protection unless a worldwide freezing order was also in place.

The decision highlights the fundamental differences, as the court put it, between public body CRO proceedings under POCA 2002 and private law proceedings for a worldwide freezing order. At the same time, it should be remembered that the decision to grant a freezing order where a CRO is in existence remains discretionary and will require consideration by the court of all the circumstances of the case.

Cryptocurrency

The rise of cryptocurrency is presenting applicants and the courts with new challenges when it comes to defining the scope of freezing orders. Two issues in particular have been considered in recent cases:

(1) Whether cryptocurrency constitutes property such as to fall within an asset class that can be subject to a freezing order.

(2) The high degree of secrecy provided by cryptocurrency and the challenges this can pose in identifying respondents and the location of the currency and in establishing the court’s jurisdiction.

In respect of the first issue, there is clear authority confirming that cryptocurrency is property under the common law and that this may be subject to freezing orders, including proprietary injunctions. This was the view taken by the court in AA v Persons Unknown and Ors, Re Bitcoin [2019] EWHC 3556, adopting a legal statement commissioned by the UK Jurisdiction Taskforce shortly beforehand, and subsequently in Ion Science Ltd v Persons Unknown and others (unreported, 21 December 2020 (Commercial Court)).

In the latter case, the court went on to consider its jurisdiction over persons unknown, where their location was not known, and the lex situs (or location) of a cryptoasset. It considered that there was a serious issue to be tried that the lex situs was the place where the person or company who owned it was domiciled. Here, the court considered that:

(1) the alleged fraud had occurred within the jurisdiction in view of representations made, transfers of funds and remote access that had been gained to the second applicant’s computer; and

(2) it related to Bitcoin that was, or had been, within the jurisdiction.

A similar approach was adopted in Fetch.ai Ltd and another company v Persons Unknown Category A and others [2021] EWHC 2254 (Comm), where the court developed further the jurisprudence regarding defining persons unknown. Rejecting the first respondent’s original proposal to define persons unknown as too wide ranging, the court said that three categories of person should be identified in the order: those who were involved in the fraud; those who had received assets without having paid a full price for them; and innocent receivers. The court emphasised the importance of maintaining a careful focus on what relief was being sought against each category, limiting the relief available against innocent receivers in particular to those assets which they either knew, or ought reasonably to have known, belonged to the claimant or did not belong to them.

These represent but some of the issues that will confront applicants. Careful thought will need to be given to the information sought from respondents, including details of the relevant cryptocurrency wallets, as well as the volatility of cryptocurrency and the exposure this can present to the applicant when giving an undertaking in damages. While helpful jurisprudence has already developed on some issues, others remained to be examined by the courts, and it is likely that such a rapidly developing area will continue to pose novel issues for applicants and judges.

This article was first published in New Law Journal, www.newlawjournal.co.uk