Freezing orders: recent key developments
As freezing orders are usually sought as a matter of urgency, the process for both applicants and respondents is often highly pressurised and it is important for practitioners to be able to move quickly. Practitioners should be mindful of a number of recent decisions that illustrate key developments in this area.
Freezing orders prevent the subject of the order from dealing with or disposing of its assets before a judgment is made regarding the ownership of those assets. As freezing orders are usually sought as a matter of urgency, the process for both applicants and respondents is often highly pressurised and it is important for practitioners to be able to move quickly (see feature article “Freezing orders in practice: going nuclear”). Practitioners should be mindful of a number of recent decisions that illustrate key developments in this area.
CROs and WFOs
A criminal restraint order (CRO) prohibits a specified person from dealing with any realisable property held by them and is essentially the criminal law equivalent of a freezing order. Given what appears to be an overlap between the purpose and effect of a CRO and a freezing order, a key consideration for parties that are considering applying for a worldwide freezing order (WFO) or that are subject to a CRO, is whether, and to what extent, a WFO is required if a party is already subject to a CRO. This issue was the subject of the Court of Appeal decision in AA v BB ([2021] EWCA Civ 1017).
Two directors of a company in administration were subject to WFOs. They appealed against the WFOs on the ground that CROs preventing the dissipation of their assets were already in place, on the application of the Serious Fraud Office (SFO), and there was therefore no material risk of dissipation. The court dismissed the appeal and the WFOs remained in place and enforceable. The court held that:
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There was insufficient provision for the claimant administrators, who were the beneficiaries of the WFOs, to be given notice if the CROs were varied or discharged. If that were to happen, the administrators might not have been able to apply in time for a WFO.
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The administrators may have separate and well-founded reasons to object to any requested use of the relevant assets, which the SFO would not consider when deciding whether to consent to the same use. Therefore, the CRO might not protect the legitimate interests of the administrators to the extent required.
AA v BB follows a similar decision in London Capital & Finance Plc and others v Thomson and others, in which the High Court held that a WFO should continue where a CRO was already in place against the respondents ([2020] EWHC 2463 (Ch)). The court held that the SFO, for understandable reasons, had different interests from the civil claimants. If the CROs were to be discharged or varied, the claimants might not find out, or not find out in sufficient time, to apply for a WFO.
These two decisions underline the fundamental difference between a CRO and WFO. The existence of a CRO does not stand in the way of the court granting a WFO or, by itself, remove the risk of dissipation of assets by a defendant that was the subject of the CRO. While respondents may raise their ongoing compliance with a CRO as a reason why a WFO is not necessary or as a means to mitigate the terms of the WFO, it remains the case that both may be necessary where the CRO does not deal comprehensively with the risk of asset dissipation.
Persons unknown
Perhaps inevitably with the rise in popularity of cryptocurrency, there has been a rise in cases of crypto fraud. In Fetch.ai Ltd and another v Persons Unknown and others, which concerned an alleged fraud where persons unknown accessed cryptocurrency accounts, the High Court considered how to define persons unknown for the purposes of making a freezing order ([2021] EWHC 2254 (Comm); www.practicallaw.com/w-032-7356). It also took into account the recent decision in Ion Science Ltd v Persons Unknown and others in considering the lex situs of cryptocurrency and crypto assets (unreported, 21 December 2020) (see box “Lex situs”).
The first respondent’s original proposal was to identify the persons unknown as being the individuals or companies that: obtained access to the accounts and carried out the alleged fraudulent transactions; and owned or controlled the accounts into which the cryptocurrency or the traceable proceeds of it were to be found. However, the court considered that this definition was too wide as the claimants were seeking not only to freeze the virtual currency that had been removed from the accounts (or its traceable proceeds) but also WFOs against those who, at least potentially, did not know or have reasonable grounds to believe that the claimants’ assets had been credited to their account. The court therefore proposed that the three categories of persons unknown should be:
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Those who were involved in the fraud.
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Those who had received assets without having paid a full price for them.
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Innocent receivers.
This meant that careful focus was needed on what relief was being sought as against each of the categories of persons unknown. The court emphasised that the third category must be defined in a way which makes it clear that innocent receivers (those who have no reasonable grounds to believe that the assets that appeared in their account belong to the claimants) will not find themselves in breach of an order. Here, this was achieved by specifying that proprietary relief was only available against assets that the persons unknown knew, or ought reasonably to have known, belonged to the claimant or did not belong to those persons.
In an area where there is very little legal precedent, both Fetch.ai and Ion Science are important decisions in setting out the courts’ approach to the novel issues raised in respect of crypto assets.
The cases demonstrate that the courts will be prepared to make freezing orders against persons unknown and illustrate mechanisms that may be used to identify those affected by the order. Practitioners should therefore not discount the ability to obtain a freezing order simply because it may not be possible, with any certainty, to adequately identify a particular entity or person due to the facts of the case.
Standard exceptions
It is common for a freezing order to permit frozen funds to be used to meet reasonable living and legal expenses and for expenditure in the ordinary course of business.
In Vneshprombank LLC v Bedzhamov and others, the Court of Appeal clarified what may be classified as reasonable living expenses ([2019] EWCA Civ 1992). Mr Bedzhamov had lived in Russia with his family and they had enjoyed a lavish lifestyle costing around $2 million per year. The High Court considered that it would be unjust for a defendant to have to reduce their lifestyle because of a freezing injunction, at any rate in the case of a non-proprietary claim, even where that lifestyle could be described as lavish. However, the court should focus on what a defendant has spent on living expenses before the injunction and also on whether they would have been able to continue spending at that level had the injunction not been made. It held that, because Mr Bedzhamov’s financial position had deteriorated drastically since he left Russia, his lavish spending on living expenses was unsustainable and £80,000 was an appropriate monthly allowance.
The Court of Appeal partly allowed the appeal, holding that the High Court had erred in taking account of what would have happened to Mr Bedzhamov’s lifestyle had the freezing order not been made against him; the correct approach is to allow a figure for ordinary living expenses that enables the defendant to maintain their previous standard of living. Except in exceptional circumstances, the court should not make an order that prevents a defendant from discharging proven existing commitments which would cause them to lose their home.
This principle was applied subsequently in Crowther v Crowther and others [2020] EWCA Civ 762. Citing Vneshprombank, the Court of Appeal confirmed 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. The purpose is to prevent a defendant from dissipating assets outside the ordinary course of business or usual manner in a way that would render a future judgment unenforceable.
Organic Grape Spirit Ltd v Nueva IQT, SL provided the Court of Appeal with the opportunity to examine the exception for expenditure in the ordinary course of business ([2020] EWCA Civ 999). It held that Organic Grape Spirit, which was subject to a freezing order, was entitled to use its assets to pursue a start-up business. The High Court had reached the opposite conclusion in view of the risk involved in the start-up business ([2020] EWHC 1837). The Court of Appeal, however, held that this was the wrong approach; the fact that there were question marks and real risks involved in the speculative business were not adequate reasons for preventing trading.
Citing various authority, the court confirmed that:
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Business transactions can be authorised either under the ordinary and proper course of business exception in a freezing order or on a case-by-case basis.
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The court should not sanction dealings or disposals that are not part of the defendant’s ordinary business where the defendant is not acting in good faith, where the apparent purpose is to ensure that funds are unavailable to satisfy any judgment or where there is no reasonable prospect of success.
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A transaction or business should not be prohibited merely because it involves risk or speculation, even if this is substantial.
However, the court did establish a safeguard: a defendant that does not have a pattern of trading cannot simply rely on the ordinary and proper business exception but must specifically ask the court to authorise the pursuit of its fledgling business.
Each of these cases demonstrates that what “ordinary” means when evaluating the scope of the standard exception will depend on the facts in each case, and the means and circumstances of the respondent. The headlines that these decisions generate may surprise practitioners at first glance. However, they apply settled principles and illustrate that the courts will be prepared to take a flexible approach in order to reflect a given case, albeit within established parameters and with suitable safeguards.
Lex situs
Lex situs means the domestic law of the place where an object is situated at the time of the event that confers title on it. In Fetch.ai Ltd and another v Persons Unknown and others, the High Court had to consider where crypto assets were situated in the context of an application for service out of the jurisdiction ([2021] EWHC 2254 (Comm); www.practicallaw.com/w-032-7356). The court adopted the High Court’s conclusion in Ion Science Ltd v Persons Unknown and others that the lex situs of a crypto asset is the place where the person or company who owns it is domiciled (unreported, 21 December 2020). The court in Ion Science acknowledged that this point had not been considered previously in case law but drew support for its conclusion from Professor Andrew Dickinson in David Fox and Sarah Green, Cryptocurrencies in Public and Private Law (OUP Oxford, 2019, paragraph 5.108), which sets out that a transaction involving cryptocurrency will in general be governed by the law of the country in which the participant resides or carries on business.
An orginal version of this article was published on 27 January 2022 by Thomson Reuters Practical Law
