Fiona Trust & Holding Corporation v Yuro Privalov & Others
A freezing order is commonly known as the court's "nuclear weapon" because of the draconian nature and the affect on the defendant of having their assets tied up for a period of time.
Typically an applicant for a freezing order must undertake to pay the defendant compensation if it is subsequently determined that the freezing order was improperly granted (known as a "cross-undertaking in damages"). This is because freezing orders are almost always granted before the case has been to trial.
Where a defendant claims the order was improperly granted, the court has discretion as to whether to enforce the undertaking and conduct an inquiry into what loss the defendant suffered because of the freezing order. Previous case law had determined that the method for assessing compensation under an undertaking in damages was on a contractual basis, with the caveat that the court may make "logical and sensible" adjustments to the assessment to reflect the fact that it is dealing with compensation for loss caused by a freezing order improperly granted, rather than breach of contract.
In 2005 the Claimant obtained a freezing order against the assets of one of the defendants, a successful businessman, up to the value of US $225m. This freezing order was discharged upon security of US $208.5million being paid into a designated account held by the defendants' solicitors (with the balance being provided by a charge over the defendant's house). These monies remained in this account until judgment was given in December 2010.
In 2007 a further freezing order was obtained by the Claimants, this time over a Defendant company, which was permitted to use the monies in the ordinary and proper course of business.
At trial the Defendant was found liable for an amount far less than the amount of assets which had been subject to the freezing orders. The court therefore exercised its discretion to enforce the cross-undertaking in damages and conduct an inquiry into the damages suffered by the Defendant as a result of the freezing order.
The Court considered it relevant that when the Claimants applied for the freezing orders, they committed serious breaches of their duty of disclosure and were therefore guilty of misleading the court. The Defendant's conduct was also criticised, not only did the Judge confirm that the Defendant had been "dishonest in at least some of his business dealings", but also "untruthful in his evidence to this court".
The Claimant applied to set aside the inquiry on the basis that: (a) the judgment was obtained by fraud; and/or (b) such compensation would be a form of equitable relief to which the defendant should not be entitled if he has acted dishonestly.
The court rejected these arguments. Although the Judge accepted that "it may seem odd" to award damages to a dishonest defendant, it held that that was no reason not to enforce a cross-undertaking. The Judge added, "It is only just that those who obtain such orders to which they are not entitled, a fortiori when they are guilty of serious failures to disclose material facts and have pursued claims described by the trial judge as 'obviously unsustainable', should be ordered to provide appropriate compensation for losses suffered".
In considering the quantification of damages the Judge took into account the 2005 freezing order only, not being satisfied that the Defendants had suffered any loss as a result of the 2007 freezing order which permitted use of monies in the course of business.
The judge confirmed that the damages should be assessed on a contractual basis, but with a "liberal assessment", in recognition of the fact that assessment of damages suffered as a result of a freezing order are inherently imprecise. The Judge also held that damages may be awarded for loss of profits, even if a claimant might have made a loss.
The approach of the Court was to determine whether the claimant had proved, on the balance of probabilities, that its trading would have been profitable. In this case the Judge was satisfied that, had the Defendant's assets subject to the 2005 order not had been frozen, its investments were more likely than not to have achieved a significant profit. The exact figure is yet to be calculated, but it is clear from the figures discussed that the defendant will receive an award of damages running into the tens of millions of US dollars.
This case is a warning that the court will not tolerate a freezing order obtained in circumstances where the Claimant has misled the court. In recognition of the devastating effects that a freezing order can have on a defendant, the court will enforce the Claimant's cross undertaking in damages, which is entirely at its discretion, and impose a "liberal assessment" of those damages.