One of the most effective and draconian powers of the English courts is the freezing order. These orders are injunctions that prevent the party against whom they are ordered from dealing with or disposing of its assets, usually up to a specified amount or value. The purpose behind a freezing order is to ensure that the assets in question remain available until an arbitral award or a court judgment can be enforced against the party in question. Because of the harm that such an order can cause, even a successful applicant must give an undertaking that it will be responsible in damages if, ultimately, it is found that the applicant was not entitled to the interim relief granted.
The High Court’s power to grant a freezing injunction is remarkably wide. In principle, these interim remedies can be deployed not just against assets outside of the jurisdiction, but also against third parties who are not the defendant in the underlying claim, who own assets that are in fact beneficially owned by the defendant. Those third parties may again be resident outside of the jurisdiction, and have little or no connection with England. Even then, they may find that they are within the reach of the long arm of the English Courts. This article looks at recent decisions that highlight when and how freezing orders may be granted against parties or assets that are based abroad.
Freezing orders are an exceptional interim remedy
Freezing orders are not easily granted. Even though such an injunction is only an interim order, it will have real, and potentially drastic, impact on the party at the receiving end. As with any injunction, as an equitable remedy, granting a freezing order is always within the discretion of the High Court. The key question is whether making the order would be ‘just and convenient’ in the particular circumstances, as required by Section 37(1) of the Senior Courts Act 1981.
A freezing injunction is not a free-standing remedy. It must support a cause of action over which (either) the English court has jurisdiction itself, or which falls within the provisions empowering the English court to make orders in support of foreign litigation (found in Section 25 of the Civil Jurisdiction and Judgments Act 1982).
The late Lord Bingham summarised the principles governing freezing orders in Fourie v. Le Roux & Ors Rev 1  UKHL 1:
“Mareva (or freezing) injunctions were from the beginning, and continue to be, granted for an important but limited purpose: to prevent a defendant dissipating his assets with the intention or effect of frustrating enforcement of a prospective judgment. They are not a proprietary remedy. They are not granted to give a claimant advance security for his claim, although they may have that effect. They are not an end in themselves. They are a supplementary remedy, granted to protect the efficacy of court proceedings, domestic or foreign …
In recognition of the severe effect which such an injunction may have on a defendant, the procedure for seeking and making Mareva injunctions has over the last three decades become closely regulated. I regard that regulation as beneficial and would not wish to weaken it in any way. The procedure incorporates important safeguards for the defendant. One of those safeguards, by no means the least important, is that the claimant should identify the prospective judgment whose enforcement the defendant is not to be permitted, by dissipating his assets, to frustrate. The claimant cannot of course guarantee that he will recover judgment, nor what the terms of the judgment will be. But he must at least point to proceedings already brought, or proceedings about to be brought, so as to show where and on what basis he expects to recover judgment against the defendant.”
The applicant has to show ‘a good arguable case’
The need to identify a prospective judgment (or award) which any freezing order would support puts the onus on the applicant to show that there is a ‘good arguable case’ against the defendant.
A ‘good arguable case’ does not, however, mean ‘having much the better of the argument’. The threshold that the applicant has to cross is not ‘a 51% of winning’. The Court of Appeal recently had occasion to review the approach that should be taken in this regard, inKazakhstan Kagazy Plc v Arip  EWCA Civ 381.
The claimants alleged a large-scale fraud and claimed damages of around $135 million. They obtained a freezing injunction against Mr Arip, the director of a company on whose watch the monies apparently disappeared, and who the claimants asserted must have been complicit. At the material time, Mr Arip was a director of the claimant company and of a subsidiary. These companies were alleged to have contracted with a purportedly independent construction company, for the development of two sites near Almaty. A total of $167.5 million was paid to the construction company, but only one site was ever developed. The one development that was built was valued at $25.32 million. The rest of the monies appeared to have been channeled to entities which the claimants believed were effectively controlled by the defendants, including Mr Arip, or their associates. The claimants also alleged fraud as regards the acquisition of a company for $39 million more than it was actually worth, with the purchase price having again been channeled into the hands of the defendants.
After a three-day hearing before the judge at first instance, the order was granted. The respondent then appealed. Mr Arip challenged the freezing injunction, after it had (in the usual manner) been granted in a without-notice application made by the claimants.
For the purposes of challenging the injunction, Mr Arip did not set out to explain what had happened, or how all of this might have been a misunderstanding. Instead, he accepted that, on its face, there was a good arguable case that the claimants had been defrauded in the manner that they alleged. He did, however, argue that he had a limitation defence under Kazakh law which defeated the claimants’ case. To pursue this point, Mr Arip had to make the unattractive argument that, even if the fraud had occurred, the claimant companies ought to have been aware that they had been defrauded a lot sooner, and done something about - by pursuing Mr Arip within the three year period that Kazakh law allowed.
The Court of Appeal felt that the application had taken up much more time than it should have done, and warned against applications for freezing injunctions becoming mini-trials. Ultimately, the Court of Appeal was not willing to interfere with the judge’s assessment of the (voluminous) material before him, and his conclusion that the claimants had overall shown a good arguable case despite the limitation point. Jackson LJ commented as follows:
“Having said that, I regard the [… limitation arguments …] as formidable. There is a very real possibility that the Defendants’ limitation defence will prevail at trial on the basis of Kazakh law (the effect of which is agreed between the parties). It is only by a narrow margin that KK’s case is strong enough to support their entitlement to a freezing injunction.”
This decision reinforces the point that a good arguable case does not have to be a ‘slam dunk’, and that even a defence with a very real prospect of success is not an unsurmountable obstacle to obtaining a freezing injunction.
The risk of dissipation and the foreign element
Establishing a good arguable case is, however, just the first hurdle that the applicant must overcome. In addition, it must also be proven that assets in fact exist and that there is a risk that the assets might be dissipated.
Such assets do not necessarily have to be located in the jurisdiction, but the English court must have a basis on which it can act, and a good reason for making the freezing order. This is illustrated by the latest decision in U&M Mining Zambia Ltd v Konkola Copper Mines Plc  EWHC 3250 (Comm), long-running litigation concerning the exclusion of the claimant mining company from the defendant’s copper mine in Zambia. The parties eventually reached a commercial agreement, which was set out in a settlement agreement dated 26 October 2012.
The defendants, however, then alleged that they had been induced to enter into the settlement agreement by various fraudulent misrepresentations on the part of the claimants. The claimants commenced arbitration proceedings, seated in London, to enforce the settlement agreement, and were successful. By an award of 7 November 2013, a tribunal ordered the defendants to pay $13 million. They also awarded the claimants their legal costs on the indemnity basis. Faced with the defendant’s refusal to make any payments, the claimants commenced enforcement proceedings and sought a freezing order.
All of the defendant’s assets were located in Zambia, and neither parties nor the subject matter of the dispute had any material connection with England. To succeed in their application, the claimants had to persuade the English court that it had jurisdiction to make the order, and that there was a risk that the defendants would take steps to move their Zambian assets beyond the reach of the claimants.
Teare J’s decision provides a good illustration of how the English courts will approach the question of whether there is a risk of dissipation. The claimants’ case on that point heavily relied on the defendants’ conduct in the wider dispute and in the arbitration proceedings. Teare J was not persuaded by alleged threats that the defendants had made prior to entering into the settlement agreement, and by allegedly dishonest applications for urgent interim relief in the Zambian High Court. The judge was, however, influenced by the fact that the defendants could be shown to have relied on dishonest, or untrue, evidence in the arbitration on two occasions.
In one instance, the defendants had procured an undertaking from the claimants that the claimants would not remove their mining equipment from the site, and that this equipment would provide security for the defendants’ claims. The basis on which the tribunal ordered the claimants to give that undertaking was that the defendants had every intention of continuing to operate the mine - which turned out to be untrue. The defendants’ allegations of fraud in respect of the settlement agreement, based on which they applied for urgent relief in the Zambian High Court, also turned out to be unwarranted. Teare J found that it was striking for the defendants to have relied on untrue evidence on two occasions, and that the defendants’ conduct both in the arbitration and in the Zambian High Court showed a willingness to cause harm to the claimants. He then turned to whether that conduct was such as to warrant an inference that the defendants might be willing to move their assets out of the reach of the claimants:
“It is necessary to consider whether the court can infer from the totality of KCM’s conduct (rather than from each piece of conduct separately) a risk that KCM will deal with its assets other than in the ordinary course of business in such a way as to make enforcement of the arbitration awards more difficult. U&M has adduced evidence that personnel employed by KCM are willing to give untrue evidence, are willing to cause unnecessary harm to U&M and are willing to take untenable points with a view to delaying the time when the second award can be enforced. Further, the arbitration tribunal found that KCM had been obstructive in resisting the application for the determination of the validity of the Settlement Agreement as a preliminary issue.
In my judgment such conduct is solid evidence from which it can be inferred that there is a risk that KCM, unless restrained by an order of this court, will deal with its assets other than in the ordinary course of business with a view to making enforcement of the arbitration awards more difficult.”
None of the conduct that the judge took into account in reaching the conclusion that there was a risk of dissipation in fact amounted to any dealings by the defendants with their assets. Nonetheless, the defendants (and their employees) having proven themselves as obstructive in the arbitral process, taking untenable points and delaying the proceedings, as well as having lied in their evidence, Teare J had no difficulties in finding that such a company would also be willing to hide its assets to endeavor to frustrate enforcement of the arbitral award against it.
The defendants argued that they were anything but an offshore entity and had many capital assets (some of which were mortgaged) that were being used to operate copper mines on a daily basis. The judge however found that it was the company’s liquid assets, cash in bank accounts in Zambia, that were at risk of being dissipated.
The claimants had mounted a second attack in their attempt to establish that there was a risk of assets being dissipated. They relied on how they said the defendants were treating their unsecured creditors. The claimants had gotten hold of a report by the Zambian Government’s Technical Audit Commission, which they submitted showed that the defendants had deliberately structured its affairs in such a way as to make it more difficult for unsecured creditors to attach any assets. It was alleged that cash was being channeled to another company (Vedanta), and that cash was being spent on new capital projects in preference to discharging existing debts. The key issue was whether Vedanta had invested $2.8 billion into the defendants (or whether the money had come from returns generated by the defendants and bank loans), and whether sales of copper by the defendants to Vedanta or its associates were at an undervalue. The evidence was not sufficiently clear in favour of the claimants, and the defendants had provided some plausible explanations for their relationship with Vedanta. Teare J concluded that:
“The evidence of course gives rise to a risk that U&M may not be paid because KCM appears to lack the resources to pay all its debts. But that, by itself, does not establish a risk that its assets may be dissipated other than in the ordinary course of business. It is no part of the purpose of a freezing order to pressurise a defendant into discharging the claimant’s debt in preference to the debts of others: see Camdex International v Bank of Zambia  1 WLR 632 at p.640 per Phillips LJ.”
This case shows just how important it is for a defendant to avoid giving the impression that they are out to frustrate the arbitral process - during, as well as after, the conclusion of that process, when the successful party moves on to enforcement. One might have thought that without some concrete evidence that the defendants were actually in the habit of transferring assets away by some less-than-transparent means, or were about to make a major disposal knowing that the claimants were coming after them, it would be difficult to establish the necessary risk of dissipation without which no freezing order ought to be granted. However, as the defendants had shown a history of deplorable and obstructive conduct in the arbitration, they were effectively tainted in the eyes of the English court. Teare J’s decision also provides a reminder that a lack of available assets is no reason for granting a freezing order. It has to be recalled that the claimants here had an existing award, and were an unsecured debtor, rather than someone relying on a good arguable case at the interim stage. Still, they were in the same boat as all the other unsecured creditors, and could not expect preferential treatment by having assets frozen.
Having established that there was a risk of dissipation, the claimants still to show that it was just and convenient for the English court to make the order. The defendants argued that since all the assets were in Zambia (and there were none in England), the appropriate forum for any enforcement action was plainly the High Court of Zambia, which could also make freezing orders with a wide-ranging effect. They derived support from a statement made by the Court of Appeal in Credit Suisse Trust v Cuoghi  QB 818, that:
“… where a defendant and his assets are located outside the jurisdiction of the court seised of the substantive proceedings, it is in my opinion most appropriate that protective measures should be granted by those courts best able to make their orders effective.”
Teare J was not persuaded by this. His starting point was that there had to be some real utility or purpose in granting the order, otherwise it would not be just and convenient. The basis on which the English court had jurisdiction over the defendants was found in the arbitration agreement, by which they had agreed to arbitrate in London, under the Arbitration Act 1996 and subject to the English court’s supervisory powers. Section 44 of the 1996 Act gives the English court the power to grant interim relief in support of an arbitration, and that power includes world-wide freezing orders.
That power is discretionary - even where England is the seat of the arbitral proceedings. While the English courts might not be willing to grant an injunction in support of an arbitration seated abroad, where the substantive law of that foreign jurisdiction applies (as was the case in Econet Wireless Limited v Vee Networks  EWHC 1568 (Comm), where Nigerian law applied), they may readily grant world-wide freezing orders where England is the seat of the arbitration: a good illustration is Belair v Basel  EWHC 725 (Comm), where the English courts granted a freezing order over the former presidential palace in Tbilisi, the capital of Georgia.
In the case before him, Teare J concluded that while the Zambian courts were also capable of granting the relief sought, that was no reason for dismissing the claimants’ application:
“This is a case where it is appropriate for two courts to grant a freezing order against KCM; this court because of the London arbitration clause, and the court of Zambia because that is where KCM is resident. However, I do not accept that the fact that it may be appropriate for another court to grant a freezing order means that it is inappropriate for this court to do so where this court’s in personam jurisdiction over KCM derives from the London arbitration clause to which KCM agreed. Nor do I consider that it is more appropriate for the Zambian court to issue a freezing order given that the seat of the arbitration was London.”
Freezing injunctions against third parties
Another facet of the English court’s power to grant freezing orders is that they are, in principle, available against third parties, who are not defendants in any underlying arbitration or litigation. This is usually referred to as the “Chabra” jurisdiction, based on the decision in TSB Private Bank International SA v Chabra  1 WLR 231 which established that such orders could be granted.
In Cruz City 1 Mauritius Holdings v Unitech Ltd  EWHC 3704 (Comm), the Commercial Court recently considered the Chabra jurisdiction in the context of enforcement of an arbitration award for more than $330 million. An LCIA tribunal had found in favour of the claimants, Cruz City, a special purpose vehicle incorporated in Mauritius. The dispute concerned a slum clearance project in Mumbai, with extensive development of the area planned following clearance (the ‘Santa Cruz’ project). Unitech is one of India’s largest real estate and development companies. Other judgments given by the English courts in this long-running saga record that the consolidated balance sheet of the Unitech group had a surplus of around $1.8 billion.
Following delays to the project, Cruz City exercised a put option, required Unitech and other defendant entities to acquire Cruz City’s 50% shareholding in the project. Unitech and the other defendants refused to comply. Cruz City then brought its claim in the arbitration, and was awarded the very substantial sums against delivery of its shares. Unitech still refused to pay, and sought to challenge the awards in a number of ways - none of which were successful. Cruz City then embarked on a series of applications to the Commercial Court all aimed at enforcing the award against Unitech’s assets, and assets held by a number of Unitech’s group companies incorporated in a range of jurisdiction. By October 2014, a number of orders had been made, including freezing orders and the appointment of receivers by the English courts over assets located abroad. In that context, Males J remarked that (Cruz City 1 Mauritius Holdings v Unitech Ltd  EWHC 3131 (Comm)):
“… recovery of the award debt by other processes of execution in the countries where the defendants have assets is not practicable, at least in any reasonable timescale. The defendants have made clear that they will do everything they can to frustrate such enforcement. The evidence shows that they are likely to be able to delay enforcement (depending on the jurisdiction concerned) for months or even years. If their position in the various proceedings abroad is correct, the award cannot be enforced in those jurisdictions at all. In such circumstances the need for the appointment of receivers goes well beyond mere convenience …”
Cruz City then applied for a further freezing order against five Unitech group companies, all of which were incorporated outside of England, and had no assets or any other presence in England. The basis of this application was that, nonetheless, the English courts had jurisdiction over these companies as they fell within the Chabra principle, as subsequently developed.
Males J explained the scope of the Chabra jurisdiction as follows:
- It enables the grant of freezing orders against third parties where there is a good arguable case that assets which are apparently owned by a third party (for instance, where legal title vests in the third party) are nonetheless beneficially owned by the defendant. Of course, beneficial or equitable ownership by the defendant would make such assets available for the purposes of enforcement.
- If a Chabra order is granted, the legal owner of the assets is prevented from disposing of them pending a final decision in the underlying claim against the defendant, and a further final determination of whether the assets are in fact beneficially owned by the defendant.
- The Chabra jurisdiction goes beyond beneficial ownership, and extends to assets that could be made available to a creditor of the defendant by the appointment of a liquidator or receiver, who might have the power to make third parties disgorge assets, or require them to make contributions to the fund out of which creditors would be satisfied. This was what Cruz City was really seeking: if the five companies were, in the final instance, unwilling to hand over any assets that might have been frozen by an (interim) injunction, then a receiver would have to be appointed over them. That receiver could only compel the companies to give up the assets by going through the competent, local courts of the place where they were incorporated.
- At its widest, therefore, the Chabra jurisdiction allows the court to control the dealings of assets where the third party has both legal and beneficial ownership, and where there is no direct cause of action by the applicant / claimant against the third party. Because the jurisdiction is so wide and unusual, caution is required before any freezing order will be made pursuant to it.
That need for caution made is particularly important to be clear that not only was there a connection between Unitech and the five companies and the relevant assets, but Cruz City also had to show that there was basis on which these five entirely foreign companies were within the reach of the English courts. There had to be basis on which the Commercial Court could assume jurisdiction and permit service of proceedings on the (alleged) Chabradefendants.
In the matter before him, Males J noted that Cruz City had led seemingly compelling and uncontradicted evidence that Unitech freely moved its assets (and debts) around these offshore companies at will, on whatever basis suited it best. That alone was not, however, a sufficient basis on which the court could intervene. The companies remained:
“… separate corporate persons. So far as the law is concerned, there is nothing inherently wrong in such a group structure and no question of piercing the corporate veil. (Indeed the claimant is itself a special purpose vehicle established for the purpose of the transaction which gave rise to the parties’ dispute). While Unitech has agreed to arbitrate in England and must therefore be taken to have submitted to the supervisory jurisdiction of the English court, there is no basis in English law for suggesting that its subsidiaries who are not parties to any arbitration agreement have done likewise. They cannot be treated as having done so merely by virtue of their status as subsidiaries, regardless of the degree of control exercised over them by Unitech as their parent company: cf. Peterson Farms Inc v C&M Farming Ltd  EWHC 121 (Comm),  1 Lloyd’s Rep 603.”
That above caveat proved fatal to Cruz City’s application: none of the Chabra defendants had themselves submitted to the jurisdiction of the English courts (unlike Unitech, which had agreed to arbitrate in London, subject to the Arbitration Act 1996 and the supervisory function of the English court). Males J found that there was simply no basis in the Civil Procedure Rules (“CPR”) or the Practice Direction (“PD”) governing service out of the jurisdiction that allowed the Commercial Court to assume jurisdiction.
CPR 62.5(1)(c) permits the court to grant permission to serve an arbitration claim form out of the jurisdiction if the claimant “seeks some other remedy or requires a question to be decided ... affecting an arbitration ..., an arbitration agreement or an arbitration award”. The judge found that Cruz City could not rely on the gateway in CPR 62.5(1)(c), because it simply did not apply to anyone who had was not a party to the arbitration agreement or the arbitral proceedings.
PD 6B, paragraph 3.1(3) provides a jurisdictional gateway where a claim is made against a party on whom the claim form has been served (the anchor defendant), there is real issue to be tried between the claimant and the anchor defendant, and the claimant wishes to serve the claim form on another person who is a necessary or proper party to the claim. That did not apply either, because there was no substantive claim by Cruz City against the anchor defendant, Unitech. The claim against Unitech had already been decided in the arbitration. This finding may seem a little harsh on Cruz City, because the claim that it was seeking to make was to enforce the LCIA awards against the assets of Unitech, something that Unitech was plainly resisting. Nonetheless, Males J found that the way in which the jurisdictional gateway had been drafted left no room for Cruz City’s arguments.
The decision in this case might seem to go against the policy that arbitration awards should be enforced, and that the English courts should do everything in their power to assist with that. Males J plainly accepted that this was a strong policy consideration, but he also noted the cardinal rule in interpreting jurisdictional gateways narrowly, and resolving any doubt in favour of the (prospective) foreign defendant. He found that:
“… that policy [to enable effective enforcement of English arbitral awards], important as it is, does not mean that the jurisdictional gateways should be approached with a predisposition to find that service out of the jurisdiction is permitted against a Chabra defendant. [Counsel for Cruz City] submits that if such service is not permitted in aid of enforcement of an English arbitration award even in a case where the merits are strong, that would drastically reduce the scope and utility of the Chabra jurisdiction and would undermine the policy of upholding the effectiveness of arbitration awards. In my judgment, however, to say that the scope of the jurisdiction would be reduced begs the question whether the jurisdiction should be available against a foreign defendant with no presence or assets here who has not agreed to submit to the jurisdiction of this court. The policy of supporting arbitration cannot justify construing the jurisdictional gateways in a way which extends their scope beyond their proper bounds.”
In this particular case, the Commercial Court had gone as far as it could in assisting Cruz City. Ultimately, realising any assets held by the Chabra defendants would have to depend on effective local enforcement action in the jurisdictions where they were incorporated, so there was limited utility in granting the order.
The English courts’ power in relation to freezing injunctions is wide and impressive. However, difficult legal issues can easily arise and these applications will frequently be hard fought: obtaining such an order will not come cheap. There is also the quid pro quo of the damages undertaking, which means that in complex cases, a careful analysis of the merits should always be the place to start.