Freezing orders are seen as a “nuclear” option in the English court’s arsenal. They are intended to restrain the defendant from dealing with or disposing of its assets, such as bank accounts, shares or property until judgment can be obtained or enforced.
Freezing the defendant’s bank accounts is quite a popular remedy in English Courts. A standard freezing injunction from the English Commercial Court contains an order that the defendant quickly provides an affidavit (a sworn statement) disclosing all its assets beyond a certain minimum threshold. If this is not complied with, or provide incomplete or incorrect information, the people behind the offshore company may be subject to committal proceedings (ie sent to prison). This often comes as quite a shock to a defendant and for this reason, it is quite a powerful weapon in the hands of a claimant who has been aggrieved in some business deal. The purpose of this note is to set out how a freezing injunction is obtained and what aspects of it are important for a claimant, in particular, to be aware of.
Arbitration or High Court jurisdiction
Where you have an arbitration award you can use the award to get the freezing injunction. The injunction will be in pursuance of this award or judgment if you have one, meaning you refer to the award or judgment in the injunction.
HOWEVER, it is not necessary to have got this far with your claim. It may be possible to obtain a freezing injunction in contemplation of arbitration that has yet to begin.
The main point is that you as a claimant may have options to obtain a freezing injunction before arbitration or court proceedings have got under way. As a claimant you may use the fact you have frozen funds as a leverage against your defendant and force them to negotiate. This is because once an account is frozen, it immediately makes it difficult for the defendant to carry out their business.
The legal test
The essential issue for the court to consider when deciding whether to grant a freezing order is whether it appears to the court that it is “just and convenient to do so” (section 37(1), Senior Courts Act 1981). What this means is that a freezing order will be granted only if:
- The claimant has a pre-existing cause of action with a “good, arguable case”. In other words, the case must have a strong basis and be likely to stand up to scrutiny. It does not have to be fully proven at the outset; it just has to have potential.
- The English court has jurisdiction to hear the substantive claim or has a statutory power to grant the order. If there are an English law and jurisdiction clause in the contract this will be enough.
- Assets exist in respect of which there is a real risk of dissipation. The Claimant has to show there are some assets to freeze in the first place.
- The claimant provides an undertaking in damages. This is a promise by the claimant to compensate the defendant for any damages that may result if it turns out that the freezing injunction was obtained wrongly.
Urgency
The best way to make use of a freezing injunction is to obtain it on an urgent basis and maximise the element of surprise. You can use the injunction as negotiation leverage and try to negotiate on the basis that is easier for the defendant to do a deal than fight about how to release the funds.
When something is urgent it is better to use a firm of lawyers who are used to doing this type of injunction. It is a “horses for courses” type of situation where you would rather use a horse (or law firm) who knows the track. You do not want your lawyers to be trying to do this for the first time, if the injunction is being obtained “out of hours” by phone to a judge on a Sunday night, for example. (We have done this).
Service
“Service” of a court order means bringing it to the attention of the person it is being sought against, be they a natural or legal person (a company).
It is of interest to note that in recognition of the fact that these orders are made on an urgent basis, it is possible to obtain permission from the court to serve or notify the defendant of the freezing order by Whatsapp or other social media channels such as facebook messenger. Likewise, it may also be possible to serve them at an email address. The effectiveness of these methods may depend on the local law of the country in which the defendant is located. As with all aspects of life thanks to the internet, it is becoming harder for people to hide.
In the past, there was a risk that if you served on a physical address in some far-off jurisdiction, the defendant could try and avoid service by physically avoiding service (not opening the door). With the modern analysis of meta-data and analysis of information relayed from servers, it is harder for defendants to say that they have not been served or notified because the very fact of the email or Whatsapp being opened is available. This sort of information which is used as evidence is only available to those who know how to look for it, so it is imperative that lawyers who you instruct have the technical know-how needed.
When to use a freezing injunction
The idea behind seizing assets it to be able to grab something belonging to your opponent. If your contract is with a well-known company and you know where their assets are, there is probably less need to use a freezing injunction. Think: Siemens or Coca Cola. If their “things” are easy to see, on their website or otherwise, then it is easier to pursue the route of suing them in court or arbitration first, then “enforcing” (which essentially means “taking) afterwards.
If you have good intelligence and can prove that money is passing through a company, and ideally that it is going through an English bank (whether in the form of a letter of credit or other forms), you could seek an order that instead of the being paid to your debtor the money be paid to you. This is called a third-party debt order and is available in respect of banks accounts in England.
HOWEVER, what is more useful in an international trade context is the fact that you can use a freezing injunction to freeze an overseas bank account.
If you are dealing in commodities trading and shipping, then it is likely that your counterparty’s assets are not visible. In this case, you need to think of ways of seizing them, which is when a freezing injunction can be very useful.
Risk of assets disappearing
As a claimant seeking a freezing injunction, you need to convince a judge that there is a “risk of dissipation of assets”. This means there is a risk the defendant is going to move all of his money away from the company you contracted with so that if you obtain a judgement in your favour in the claim in court or arbitration, you will not be able to do anything with the judgment when the time comes to enforce. This will be because the assets will have been dissipated, in other words: disappeared. What amounts to “dissipation”, or a risk of that happening, depends on the facts, which means that in some cases it will be clear that the defendant’s actions in the claim to date point to the possibility they are about to disappear. This may be enough to convince a judge to grant you one of these wide-ranging and powerful orders.
What account to freeze
It is likely that the starting point will be the bank account on the invoice or other relevant documents which was part of the original transaction. It might be possible to find other accounts by searching on the internet. Companies are sometimes a bit careless about where they publish their account details. For example, they might have provided bank details in public tenders they have participated in where it was a requirement to supply an account and this may be left lying around on a document on a website somewhere.
Without notice
A very useful tactic to use with freezing injunctions is to obtain them “without notice” to the Defendant, ie without telling them, or essentially, behind their back.
If the defendant has not been given three full “clear days” (as defined in court procedure) notice of the application, then the application for the freezing injunction is deemed to be one that is made “without notice” to the defendant. In other words, the defendant is not being told about it. Usually, under the law, it is deemed to be unfair to obtain a court order against someone without them having a chance to know about it and defend themselves. A “without notice” application is a type of application where it is possible to get such an order, but it comes with some provisos, which are there to protect the defendant in case it turns out that the claimant was the one who is in the wrong.
One proviso is the idea that the claimant must, at the hearing, speak on behalf of the defendant, because the defendant is not there. The claimant must, therefore, raise arguments which the defendant would make if it was present. This is not how things are done normally. Normally, a claimant’s lawyer would never make an argument in court that would assist the defendant. This whole exercise of the claimant making such arguments comes under the heading of: “full and frank disclosure”, which is what it sounds like, meaning the claimant must alert the court to arguments the defendant could make if they were present. This does not amount to a full-scale analysis and explanation of all the merits of the defendant’s case, it is just a matter of signposting the relevant points.
Cross undertaking in damages
It is easy to imagine how a weapon like the freezing injunction if used in the wrong hands could cause terrible damage to an innocent party.
It, therefore, follows that there must be some provision which protects potential defendants who suffer damages as a result of a wrongly carried out a freezing injunction.
This exists in the form of the “cross-undertaking in damages”. This means that if a claimant obtains a freezing injunction, they must agree to pay any damages to the defendant which the defendant suffers if it turns out that the freezing injunction was wrongly granted. For example, if the claimant is the one who is in fact at fault and they are using the injunction to disrupt the defendant’s business, there needs to be some way of making sure that the defendant is not left without a remedy. This is the “cross-undertaking in damages”. The claimant “undertakes” to pay damages which have been inflicted as a result of the wrongly used injunction.
If the court at the injunction hearing is not convinced the claimant will have enough money to pay these damages, it might order that the claimant provide “fortification”, which means the claimant has to pay money up front to show they would have money, if there is a damages award against them. This is a matter for discussion at the freezing injunction hearing, so it is not certain that it will be required. However, such fortification could be in the region of USD$ 200,000 – USD$ 300,000 in a USD$ 1 million claim. If fortification is ordered, the freezing injunction will not be granted until that money is paid into court, or a bank guarantee is provided, which is the other common option.
A very rude awakening
Imagine you are a defendant in a case, and you receive a Whatsapp message which tells you that:
- The message contains a court order from the High Court in England.
- The order is freezing your bank accounts.
- The order is restricting the way in which you can manage your company.
- You must report all payments made by your company over USD$ 10,000 from now on the court.
- You must give details of all your assets both bank accounts and physical over USD$10,000, to the court.
- If you do not comply, you will be in contempt of court and at risk of going to prison.
This is a summary of what a freezing injunction means. It is, therefore, an extremely useful negotiating tool because once the defendant receives this message, they might decide it is easier to do a deal with you, the claimant, than comply with this.
Penal Notice: Threat of committal proceedings (ie prison!) as a negotiation tool
The standard form of court order which the defendant will receive in the post or by email or Whatsapp says at the top:
“If you [INSERT DEFENDANT’S NAME] disobey this order you may be held to be in contempt of Court and may be imprisoned, fined or have your assets seized.
Any other person who knows of this order and does anything which helps or permits the Respondent to breach the terms of this order may also be held to be in contempt of Court and may be imprisoned, fined or have their assets seized.”
Therefore, the freezing injunction can apply not just to the defendant, but also (second paragraph) to anyone who might help the defendant.
One vitally important aspect of the freezing injunction is that it carries the possibility that a director who does not comply with his company’s obligations under the order can be at risk of committal in England, ie prison. This is immediately evident from the order which is used for the freezing injunction.
If there is a threat such as this that the people behind the defendant company will go to prison, then it is much more likely that the claimant will be paid.
By prison sentences in this context, we mean a committal order which could be obtained as a result of separate civil proceedings against the responsible individuals for contempt of Court. The advantage of these proceedings over criminal proceedings is that the claimant retains full control over the process. The proceedings can be terminated at any time by the claimant, for example, if the parties reach a settlement. By contrast, when one files a criminal complaint the matter is managed by state prosecution authorities who may decide to proceed to charge the responsible individuals even if the underlying civil dispute settles.
Freezing of bank accounts
The most important part of the order is obviously the part which says that xyz company’s bank account at ABC Bank, IBAN 123456789 can be frozen. This is the part which allows the claimant’s lawyers to write to ABC Bank and make them aware of the order.
However, there are other provisions in the order too.
Obligation to inform the court of the existence of assets over a certain amount
The following wording in the order obliges the defendant to inform the claimant’s lawyers about its assets. It says the defendant:
“must [within [] hours/days] of service of this order] and to the best of his ability inform the Applicant’s solicitors of all its, her or his assets [in England and Wales] [worldwide] [exceeding £ in value1 ] whether in its, her or his own name or not and whether solely or jointly owned, giving the value, location and details of all such assets.”
This wording means that the defendant is obliged to tell the claimant’s lawyers and the court about its assets, worldwide, up to certain amounts. This includes all their bank accounts worldwide.
The type of assets this would include are not just cash in bank accounts but include corporate vehicles (so for example, the director’s own Porsche, if it is registered as a company car).
The above wording states that the defendant company must inform the court of the assets. This is done in a sworn statement called an affidavit. The director has to list the relevant assets in the affidavit. Since this is a sworn court document, the claimant can apply for an order compelling the director to testify in court on the basis of what it says in this document. In other words, the director has to come to London and tell a judge in person that what he or she has said in the statement is true. If the director is found to be lying, they will be in contempt of court and will risk prison. It goes without saying that this is an extremely powerful aspect of this procedure.
Obligation to inform the court of movements of cash over a certain amount
There is also the following wording in the order in relation to the movement of assets:
“This Order does not prohibit the Respondent from dealing with or disposing of any assets in the ordinary course of business, but before spending any sum in excess of [GBP / USD] in respect of a single item of expenditure, the Respondent must tell the Applicant’s legal representatives.”
The order freezes the defendant’s bank account up to a certain amount which the judge decides when it is obtained. This is usually an amount which is as close to what the overall claim is logically likely to be.
However, as part of the Order, there is an obligation on the defendant to tell the claimant if it plans to spend money up to a certain amount.
Again, this is a very powerful tool because defendants will not expect that they may have to comply with this sort of obligation. The size of the number in the brackets (above) will depend on the facts of the case, but in the case of, for example, an order freezing USD$ 500,000, a figure of USD$ 10,000 would be common. One can imagine the surprise that a director of a defendant company may experience upon being told that may have to notify a lawyer in another country every time he or she plans to spend more than USD$ 10,000.
This part of the order is referred to as the “ordinary course of business exception” because it is supposed to allow the defendant to carry on their business while waiting for the court hearing but still report payments over a certain amount, eg, USD$ 10,000 as above.
Having said that, it is of itself nevertheless restrictive, because prior to the order, the directors of the defendant could do as they pleased, whereas once the order is in place, they have to make an evaluation of whether the expenditure is in the ordinary course of their business and then if it is over the threshold, report it. There is a lot of case law on this phrase of the proceedings and it is an area where lawyers can argue for quite some time. This is obviously detrimental to a defendant in terms of running their business and they might decide that it is easier to negotiate than waste time arguing with lawyers.
The court hearing
The Order states that the defendant, or its legal representative, must come to court in London to attend a hearing where the issues raised in this note, such as the defendant’s assets, will be examined. This hearing is known as “the Return Date hearing”. Again, this is very likely to be unexpected by the defendant, especially if they are from a different country. The cost of instructing a firm of London solicitors and a barrister just to attend this hearing may also be surprising to them.
The extent to which the defendant has complied with the Order will be examined by the judge at the Return Date. This means that the judge will look at the evidence they have provided of the assets they own, and also the evidence relating to the amount of money they say they need to carry out their business under the “ordinary course of business” exception.
If the defendant is well advised legally, they might make an application to set the freezing injunction aside prior to the return date. By “set aside” we mean “discharge” or nullify.
Setting the freezing injunction aside
The most obvious course of action for a defendant is to try and argue either at the Return Date, or beforehand at hearing, that the order was wrongly granted and that it should be discharged. the arguments available to the defendant are as follows:
Showing that there is no risk of dissipation of assets. If the defendant can convince the judge that they have no intention to move assets out of the company then the Order may be discharged. This is likely to depend on the facts of the case, so it is difficult to give a brief answer. However, if the defendant can show that they are, for example, an established business that has been around for 20 years and has no reason to move assets out of reach of the claimant before the court case which deals with the underlying claim, this may be a reason for the judge to discharge the freezing injunction at the Return Date.
Showing that the claimant’s case is spurious and has no prospect of success. This would, as a matter of common sense, lead the judge to discharge the order at the Return Date.
Arguing that the order is not in the interest of justice. This is a bit a “woolly” or unclear point, but basically, if the defendant can show the overall effect of the order is unfairly oppressive to the defendant, this may be enough to convince a judge to discharge it. This will involve weighing up the effect on the defendant with the evidence and making a decision based on this evidence. As can be imagined, it is a “case-by-case” type of examination.
Challenging the jurisdiction of the English court, by arguing that the law of another country should apply. If there is an English law and jurisdiction clause in the contract, as there often is with commodity and trading contracts, this will be difficult.
The Defendant’s obligation to provide information about their assets at the Return Date hearing
It will come as a shock to the defendant that they have to disclose so much information about their business to the claimant and the court in advance of the Return Date hearing.
The defendant is in a very tricky position because they are obliged to be completely truthful to the court about all of their bank accounts and assets worldwide. However, in businesses such as the international trading of commodities and in the shipping business, fortunes are built on keeping details of assets very quiet. It will, therefore, be anathema for such a defendant to have to come to court and reveal all. If they do reveal all, they will feel as though they have left themselves completely exposed. If they do not, there is a risk they will be liable for contempt if the claimant’s lawyers can prove that they hide details about a bank account, or about some assets above the threshold (and note, the threshold could be as low as USD$ 10,000 for each individual asset to be listed).
The claimant’s lawyers will be using the methods above such as desktop research of assets on the internet, possibly using private investigators. It is also very likely that the claimant itself will already have a good idea of the financial position and assets of the defendant from local knowledge and connections as people often operate within the same pool of connections over time and word “gets around”. It is better for the defendant to be honest, but this forced honesty is another reason for the powerfulness of these injunctions. It is often easier for the defendant to negotiate a settlement than have to come to court and reveal all.
* The “freezing injunction” is the procedure. The “order” is the piece of paper from the court that tells the defendant what they must do. It is the “to-do list” the court orders the defendant to comply with. Eg: “give details of assets above USD$10,000”.
Why use us?
Most law firms do not use technology to the extent we do.
For example, many lawyers will not be aware of how modern technology can be used to produce an affidavit, which is the sworn statement used in evidence in orders of this type, in an instant. We have seen plenty of recent advices on certain databases used by all lawyers which say that you should make sure you have access to yet another firm of lawyers close in physical proximity should you need to go and prepare a sworn statement. This indicates that other lawyers are simply unaware of the tools which are available obtain these sworn statements online in minutes at any time of the day or night.
Likewise, other lawyers do not seem to be aware of the possibility of obtaining evidence available on the internet about company’s assets or forensically examining evidence such as metadata to the extent we are able to.
It is not always possible to obtain a freezing injunction, so we need to review the relevant documentation before advising. That said, it is often possible and we are willing to review your documentation for free and offer a view, so there is no harm in asking us.
We are specialists in the field of freezing assets in this way. In situations like this speed and discretion is key and a claimant is better off instructing a lawyer who does this type of work every day and is less likely to be held up, than someone who does it occasionally.
We take a practical and commercial approach to billing. We offer alternative billing models to the traditional “bill by the minute” which is a feature of almost all law firms.
We are a modern law firm and strive for efficiency in everything we do, as opposed to capitalizing on the billable hour model and being rewarded for inefficiency, we take a “lean start-up” approach and constantly iterate our work processes in order to drive costs down.
These are just a few of reasons you should instruct us rather than another firm. We recommend you read our guide on billing models if you wish to know more.
If you would like to know more about freezing injunctions and what we at Fortior Law can do to help you obtain one, do not hesitate to contact us at ([email protected]).
