There has been a great deal of news coverage over the recent, and unprecedented, step by the Securities Commission to obtain a surprise freezing order over the assets of former Hanover director, Mark Hotchin. Those orders are now being challenged by Mr Hotchin and the Judge's final ruling has yet to be released.

Simpson Grierson has prepared a Q&A about the Hotchin case and explaining the Securities Commission's powers to freeze the assets of people under investigation by them.

Q1. What is a "freezing order"?

A freezing order is an order of the Court preventing a person, or anyone else with notice of the order (eg a bank or trustee or creditor) from dealing with that person's assets. Normally, the order freezes all of the defendant's assets. Orders can also be sought requiring a defendant to deliver up his or her passport (though this was not an issue in the Hotchin case).

While the Courts occasionally make freezing orders in other contexts (eg where a fraud is uncovered) this is the first case where a freezing has been sought under the Securities Act.

Q2. How did the Securities Commission get the freezing orders?

Under s60G of the Securities Act, freezing orders can be granted by the Court in three circumstances. First, where a criminal prosecution has begun for a contravention of the Act. Second, where a civil proceeding (eg for monetary compensation by investors) has begun. Thirdly, and perhaps most controversially, freezing orders may also be granted where the Securities Commission is still carrying out an investigation into acts or omissions by the defendant that may constitute a contravention of the Securities Act.

The key point is that the orders can be made before any guilt or innocence has been established. The policy rationale is that it may be too late to get hold of the defendant's assets once the court case is over. Those assets may have been disposed of in the intervening period, making any financial penalty on the defendant academic.

Orders can be sought by the Securities Commission or by someone to whom the defendant may be liable. In the Hotchin case that would include an investor in Hanover, although it was the Securities Commission which brought the case. The orders against Mr Hotchin were originally obtained "ex parte" ie without notice, hence the element of surprise. This approach is typically taken where freezing orders are sought to remove the risk of assets being removed from New Zealand while a court case is pending.

Q3. What is the test for getting freezing orders under the Act?

Once a freezing order application is before the Court, and the applicant establishes one of the three circumstances applies (prosecution, civil proceeding, investigation), the Court then has a broad discretion whether to grant the freezing orders. The Court may grant freezing orders if the Court considers it necessary or desirable to do so for the purpose of protecting the interests of an aggrieved person.

In the Hotchin case the Securities Commission also argued that there was a risk of dissipation of Mr Hotchin's New Zealand based assets founded on the fact that the properties had either been or were in the process of sale and the relocation of the Hotchins' home to Australia. The Hotchins' lawyers contend that there is no substance in this risk.

To make the orders the Judge does not need to see evidence that the defendant is liable for breaching the Securities Act. For this reason, it is recognised that a freezing order is an extraordinary legal remedy and should only be exercised with caution. The legislation reflects a recognition by Parliament that there is a strong public interest in the preservation of a defendant's assets where the Commission is in good faith investigating suspected breaches of the securities legislation and where there is a risk of assets to meet potential claims being dissipated.

Q4: What happens next in the Hotchin case?

After the ex parte orders where obtained, Mr Hotchin's lawyers applied unsuccessfully for certain assets to be used by them, including two European cars. This request was rejected by the Judge, Justice Winkelman. The Hotchins were permitted to have personal and household items, excluding jewellery. The Judge refused Mr Hotchin access to the draft report prepared by the expert the Securities Commission is using to investigate whether there has been a breach of the securities law.

The hearing to revoke the freezing orders made was heard in mid-Feburary and the Judge's decision in that case will set out in detail whether the orders are to stand and, if so, why. Given that this is the first case of its kind under the Securities Act, and it involves a high profile person, we expect there to be a lot of interest in the Judge's decision when it comes out. The decision is also likely to be an important precedent for any future case where a freezing order is sought under the Securities Act.