KEY POINTS

  • There are seven principles that govern, or should govern, the jurisdiction of the court to grant a freezing injunction (FI) (not three as suggested by Beatson LJ in JSC BTA Bank v Ablyazov [2014] 1 Lloyd’s Rep 195, [34]).
  • An understanding of these principles is fundamental for practitioners seeking on behalf of their clients to invoke, or to resist the jurisdiction to award this draconian form of injunctive relief.
  • The process of obtaining or resisting FIs has two salient features worth noting at the outset. First, it can be very stressful for clients who one way or another feel that property to which they have an entitlement is in jeopardy. Secondly, successful interaction with the jurisdiction usually involves intensive collaboration between lay client, solicitor and counsel.

THE SEVEN PRINCIPLES

1. Clarity

The freezing injunction (FI) should be clear and unequivocal due to the potential penal consequences of breach for both the defendant (D) and third parties

It is worth considering whether JSC BTA Bank v Ablyazov [2015] 1 WLR 4754 satisfies the principle of clarity. The appeal arose in the course of long-running litigation between C and D. C had obtained judgments amounting to $4.4bn, none of which D had satisfied. In the context of interpreting a freezing order made by Teare J on 12 November 2009 (as subsequently amended) the following issues arose.

First, whether D’s right to draw down under loan agreements is an ‘asset’ within the meaning of the order. Second, if so, whether the exercise of that right by directing the lender to pay the sum to a third party constitutes ‘disposing of’ or ‘dealing with’ or ‘diminishing the value’ of an asset. Third, whether the proceeds of the loan agreements were ‘assets’ – within the meaning of the extended definition in the order – on the basis that D could directly or indirectly dispose of or deal with the proceeds as if they were his own.

Allowing the appeal, Lord Clarke (with whom the rest of the court agreed) held as follows. The expression ‘assets’ is capable of having a wide meaning. It can include a chose in action. There is no real doubt that a right to draw down monies under a loan agreement could be construed as an asset. However, the cases and legal writings on FIs disclose a settled understanding that borrowings were not covered by the standard form of freezing order. Clarity is important and so is certainty in the context of penal orders. It is not appropriate for the court to reverse this understanding. So, in respect of the first issue, D’s right to draw down money does not qualify as an ‘asset’.

In respect of the second issue, given the conclusion in respect of the first issue, nothing D had done amounted to disposing of, dealing with, or diminishing the value of ‘assets’.

However, as for issue 3 (whether the proceeds of the loan agreements were ‘assets’ within the meaning of the extended definition in the order), this must be answered in the affirmative. An instruction by D to pay the lender’s money, which is what it was, to a third party is dealing with the lender’s assets as if they were his own.

The whole point of the extended definition of ‘assets’ is to catch rights which would not otherwise have been caught and, in particular, D’s ‘assets’ include any asset which he has power, directly or indirectly, to dispose of, or deal with as if it were his own. In this case, D did not own the relevant assets under the loan agreements but had power pursuant to the same directly or indirectly to dispose of or deal with them as if they were his own.

Practitioners might not think that the Supreme Court has made this area of the law any clearer, not least because of the approach taken by the court to whether a chose in action can be an asset. In light of the reasoning in the judgment, further litigation about these issues can be expected.

2. Adaptability

The jurisdiction should be exercised by the court in an adaptable manner so as to enable it to react to new situations and novel means used by Ds to make themselves judgment-proof

Perhaps the best example of the flexibility of the FI jurisdiction is the development of the Chabra jurisdiction. This is most easily remembered as a bolt-on to the power to order an FI. In TSB PBI SA v Chabra [1992] 1 WLR 231 the court held that where D is restrained from disposing of assets of a company, the court has jurisdiction to join the company as a second defendant and grant an FI against it in support of C’s action against D. This is so even though there is no action against the company.

According to Flaux J, Chabra orders (joinder and a further FI) would be available where:

  1. the third party against whom there was no cause of action is in possession of assets beneficially owned by D (against whom there is a cause of action);
  2. D can be shown to control or have a power to dispose of the company’s assets; and
  3. it can be seen that there is or may be a process available to cause the beneficial owner to disgorge the assets held by the third party (Linsen International Ltd v Humpuss Sea Transport [2011] EWHC 2339 (Comm), [147-150]).

As suggested above, the Chabra jurisdiction may be thought of as ancillary to an FI (which must itself be ancillary to a cause of action). It is easy to see from the case discussed in the context of the next principle, subsidiarity, how confusion can easily arise if there is a failure to distinguish between corporate and natural persons and to identify the beneficial ownership of assets. Practitioners seeking FIs for their clients need to take particular care in circumstances in which, normally, there is little clarity or certainty about these matters.

3. Subsidiarity

An FI will be cast and construed as narrowly as practicable so as to avoid any unnecessary or disproportionate interference with the rights of D or third parties

The principle of subsidiarity may be illustrated by reference to Lakatamia Shipping Co Ltd v Su [2015] 1 WLR 291. In that case, C had obtained a freezing order, para 2 of which prohibited Ds from disposing of, dealing with or diminishing the value of any of their assets. Paragraph 3 thereof provided:

‘For the purposes of this order, the defendants’ assets include any asset which they have the power, directly or indirectly, to dispose of or deal with as if it were their own. The defendants are to be regarded as having such power if a third party holds or controls the asset in accordance with their direct or indirect instructions.’

The question was whether the FI froze the assets of three companies – which were not defendants to the proceedings – of which the first defendant was a director and directly or indirectly 100% shareholder.

Dismissing the appeal, it was held that Burton J erred in preferring the heretical view that, because the sole owner of a company is in a position to control the destiny of its assets, the company’s assets are his within the meaning of para 3 of the order. That is wrong. The owner’s control does not make the company’s assets his assets. Paragraph 3 is only concerned with dispositions of assets belonging beneficially to D, which the company’s do not. The first defendant only has power as an agent of the company to procure it to make dispositions of its assets. He has no authority to instruct the company to deal with its assets. Only the company has this authority.

If C wishes to freeze company assets of a non-defendant, he must either be prepared to make a sufficient case that the company is just the money-box of D and holds assets to which he is beneficially entitled, and/or he has to make that company a defendant itself under the Chabra jurisdiction (supra).

However, even under para 3, the company owner will not be permitted to deplete the assets of a company so as to diminish the value of his own assets in the form of his shareholdings, unless he can bring such dispositions within the order’s exception for transactions made in the ordinary course of business.

As can be seen, the Court of Appeal arrived at the same result but by a different, orthodox, and doctrinally defensible route. The lesson for practitioners seeking FIs is to pay special care to target selection, both in terms of respondents and the property which is the proposed subject-matter of the order.

4. Ancillarity

As a general rule, C must be able to point to proceedings brought or to be brought to show where, against whom, and on what basis he expects to obtain judgment. (An order quia timet is an equitable exception to this principle: see Rowland v Gulfpac [1999] 1 Lloyd’s Rep Bank 86)

The best example of the ancillarity principle in action is United States of America v Abacha [2015] 1 WLR 1917. C, the USA, had brought UK proceedings to forfeit D’s assets which were allegedly involved in money-laundering offences within the USA. The UK stated it was not able to assist in respect of assets situated in the UK by taking measures under the Proceeds of Crime Act 2002 (External Requests and Orders) Order 2005 (‘the SI’).

Stuck, C sought an FI in respect of those assets. This was made without notice and then continued by Field J who considered that, although a US judgment would not be enforceable in England and Wales at common law, it would not be ‘inexpedient’ within the meaning of the Civil Jurisdiction and Judgments Act 1982 (CJJA 1982) to grant the relief sought in order to ‘hold the ring’ pending lawful enforcement under the SI.

On appeal, the issue (superficially) was whether it was inexpedient to grant an injunction under the CJJA 1982. It was held, allowing the appeal, as follows.

There must be some utility to the grant of the FI related and ancillary to the foreign proceedings. The grant of an FI would not support or assist the proceedings in the USA whether by enforcement or otherwise: it was therefore inexpedient within the meaning of CJJA 1982.

The US proceedings were clearly proceedings in rem, rather than in personam. Any judgment would relate to property situated outside the territorial jurisdiction of the US courts. As such, it would not be enforceable at common law in England and Wales.

Even if the US proceedings could be characterised as in personam, they would still not be enforceable at common law in England and Wales because the US proceedings could only be characterised as penal proceedings. Foreign penal law is not enforceable in England and Wales.

The Proceeds of Crime Act 2002 and the SI provide a comprehensive regime for the application by UK enforcement authorities for prohibition and recovery orders in response to external requests for the securing of assets located in the UK. This scheme is an exception to the well-established rules that penal or confiscatory orders are unenforceable here.

The only applicant who may apply for a prohibition or recovery order is the UK (on whom the scheme clearly confers the power to apply for an FI). An attempt by a foreign authority to circumvent that regime including its constraints and restrictions would not be allowed.

One way of understanding the decision in Abacha is that it turned on the principle of ancillarity. There was no action to which the FI would be ancillary. Accordingly, it should not have been ‘made in the air’.

5. Personality

An FI gives C no proprietary right in the subject matter of the order and no advantage over D’s creditors – it acts against the person

The principle of personality can be seen at work  in JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2016] 1 WLR 160.

D had founded C, a Russian bank. The bank’s licence was revoked, it was declared insolvent, and a liquidator was appointed at a time when the estimated deficiency was $2.2bn.

The bank and the liquidator (L) were the claimants. The liquidation was recognised in 2014, pursuant to the CBIR 2006. Actions against D were brought in Russia and the UK alleging D misapplied the bank’s money.

An FI was made by the High Court in 2014. Paragraph 7c thereof referred to:

‘[…] any interest under any trust or similar entity including any interest which may arise by virtue of the exercise of any power of appointment, discretion or otherwise howsoever.’

On three appeals, two issues arose.

One of the issues for the court was whether it had jurisdiction to order one of a class of beneficiaries to disclose the details of the trust and its assets.

It was held that, an FI is there to prevent an asset being put beyond the reach of potential judgment creditors. Assets held by trustees under a discretionary trust would not be amenable to execution if judgment was entered against one of a class of potential beneficiaries. Naturally, once a beneficiary receives assets, they can be the subject of execution.

This notwithstanding, para 7c of the (non- standard) order the court had to interpret distinguished two types of interest. The first was an interest under a trust. The second is an interest which might arise by virtue of the exercise of any discretion. Assuming the first part of para 7c referred to a vested interest, the second part must refer to an interest of a member of a class of beneficiaries created by a trust in whose favour a discretion could be exercised. This was so even though the interest of a beneficiary under a discretionary trust could not be the subject of execution.

The lesson deriving from this decision is that care must be taken by practitioners in formulating or interpreting the wording of an FI. It is important to set aside time for this in the course of preparation. Applicants must also be in a position to explain any deviations from standard form freezing orders to the judge.

6. Enforceability

The purpose of an FI is to prevent D dissipating or disposing of property which could be the subject of enforcement if C goes on to win the case

Another way of understanding the Abacha decision (supra) is by reference to the principle of enforceability. As there was no action in the UK and no foreign action that could (without more) be enforced in the UK, there was no basis for the exercise of the FI jurisdiction.

7.  Non-penalty

It is not the purpose of an FI to punish D for alleged misdeeds or to enable C to exert pressure on D to capitulate in the action

The principle of non-penality was in play when the court was deciding the second issue in Pugachev (supra), namely when a liquidator must provide an unlimited cross-undertaking in damages. L had given an undertaking in damages limited to $75m. It was held that the judge has a discretion here. The default position is that the cross-undertaking should be unlimited as the price for interfering with the defendant’s freedom before any allegations against him are made out.

An exception to this is where the applicant has no personal interest in the litigation and brings it for others (where there is no substantial creditor willing to underwrite the undertaking). The potential availability of external funds may be relevant. A state-backed entity may be considered to be distinct from an individual professional insolvency practitioner. A defendant need not show the FI is likely to cause him loss before an unlimited undertaking is required.

The availability of funding for a cross-undertaking or alternatively the availability of reasons for not providing a cross-undertaking might sometimes be critical and game-changing considerations for trustees.

SUMMARY

The seven principles set out above govern, or should govern, the exercise of the court’s power to award FIs. An appreciation of them is important at all stages of an application for an FI; it is of particular advantage to practitioners when considering whether to seek an FI in the first place and (irrespective of whether you are the ‘freezor’ or the ‘freezee’) when reassessing the position in light of the evidence and argument served prior to the return date.

Further reading

  • – LexisPSL Dispute Resolution: Practice note: Freezing injunctions – application
  • – Freezing orders: enforcement and ancillary disclosure principles undermined? (2015) 10 JIBFL 616
  • – Relief at last? Applications for injunctive relief in the corporate insolvency context (2015) 6 CRI 237