In civil corruption cases, it is critical at the outset to secure the assets being claimed at the earliest stage.
This can be achieved through freezing injunctions, in some jurisdictions known as Mareva injunctions. They are one of the common law’s most powerful weapons. Any type of asset can be frozen, including funds in bank accounts, other investments, land and shares.
Freezing injunctions are typically obtained at the outset of a case, without the defendant's knowledge, and are intended to secure a defendant's assets, up to the value of the claim. In cases of 'grand corruption', where the full extent of corrupt activities is unknown, the injunction may have no limit.
Value of a freezing injunction
The value of a freezing injunction is not usually in its effect on the defendants: it should be assumed that dishonest defendants will seek to conceal assets in breach of the terms of an injunction if given the opportunity to do so.
Instead, the value of a freezing injunction is in its effect on third parties with control over assets, in particular banks. It is a contempt of court for anyone with knowledge of a freezing injunction to permit funds to be transferred away from frozen accounts under their control. Furthermore, freezing injunctions can be registered on the title registers of properties, thereby preventing their sale.
Freezing injunctions are often combined with other orders, such as orders requiring third parties to disclose information and evidence; orders requiring defendants to provide a statement of assets and information and evidence ; and orders permitting evidence to be seized. These are the subject of separate notes2.
Consequences of freezing injunctions
A respondent or third party that does not comply with a freezing injunction of which it has notice could be held in contempt of court. This could result in a fine, the seizure of assets or even imprisonment. It could also lead to a defendant being debarred from defending the proceedings for a refusal to comply with court orders.
It should be noted that a freezing injunction does not itself secure an asset against claims by third parties that have obtained a judgment against the defendant. However, a state will be able to prevent enforcement by third parties over frozen assets if it can demonstrate that it has a “proprietary right” to the assets, for example, because they have been obtained from funds stolen from the state.
Typically, a defendant is permitted to use frozen funds to pay legal fees, unless it can be shown that it has other sources of funding to pay his or her lawyers. Watching frozen funds being reduced by legal expense can be very frustrating. It is more difficult to use funds for legal expenses where a state has a proprietary claim.
Types of freezing injunctions
There are various types of freezing injunction. They can broadly be divided into domestic freezing orders (DFOs) and worldwide freezing orders (WFOs). DFOs freeze assets within the jurisdiction of England and Wales, while WFOs extend to assets overseas.
WFOs are considered exceptional orders (although are routinely made in corruption cases) because of the risk of oppression on the defendants, and because of the risk that third parties such as banks will be in breach of foreign law in complying with their terms.
A WFO is immediately binding on the defendants. It cannot, however, be enforced abroad without the permission of the English Court, and it is not binding on foreign third parties until enforced by their local court. In the meantime, third parties including foreign banks or branches of banks aware of the WFO may comply with what they reasonably believe to be their obligations under foreign law.
Branches of United Kingdom banks and, to a lesser degree, foreign banks will be concerned about the movement of assets in breach of a WFO. However, to be fully effective a WFO must be enforced overseas, and this means obtaining freezing orders in relevant foreign courts supporting the English WFO. The ease and procedure for doing so will vary between jurisdictions.
Where a state has a proprietary claim to an asset, the Court may issue a proprietary injunction. Here, the Court will not require a state to prove there is a risk of dissipation, although this would rarely be of practical benefit as establishing risk should be straightforward in corruption cases.
The English Courts may also issue Free Standing Freezing Injunctions in support of foreign proceedings or judgments.
The test for a freezing injunction
A freezing injunction prevents a defendant from dealing with his assets without, at that stage, any judgment against him. The draconian nature of the order means that a party seeking a civil freezing injunction has strict obligations.
For example, a claimant must establish:
- a good arguable case;
- a real risk that a defendant will dissipate his assets to avoid judgment (usually obvious in corruption cases) and that it is “just and convenient” to secure assets pending the outcome of a case; and
- that the court has jurisdiction to determine the claim.
'A good arguable case' does not mean that the state has to prove its claim, or indeed establish that it is likely to win. This is quite a vague concept, but the threshold that the state must satisfy is relatively low: effectively it is akin to establishing that there is a case to answer.
The duty of full and frank disclosure
The duty of full and frank disclosure is a critical element of the freezing injunction regime, and the price for securing assets ahead of determination of a claim. A claimant seeking a freezing injunction (or disclosure order) without notice to the defendant is under a duty properly to investigate the facts, and fairly to present the evidence on which it relies. All matters relevant to the application must be disclosed, including all matters of fact or law which may be adverse to it. A claimant must also do its best to anticipate and explain any potential defences to the claim.
Breach of this duty may lead to the injunction being discharged and an order to pay the defendant’s costs, even if the injunction would have been granted had the full facts been disclosed.
In corruption cases, particular thought needs to be given to the following points:
- Evidence is rarely complete in corruption cases and inference may be an important factor; it is important to clearly explain gaps in the evidence, the fact that the case relies on inferences and that there is a possibility of innocent explanations for some or all of the matters relied upon.
- The corrupt activities may have occurred in a different country to the one where the proceeds of corruption are held, and therefore where civil proceedings are fought. Evidence may be required to show that the corrupt activities would found a good claim in the law of the country where they occurred.
- Is there a risk of breach of domestic or foreign laws in deploying the evidence? For example, was it obtained by the use of criminal coercive powers and is there a risk of a finding that it should not be relied upon in civil proceedings?
Given the need to move promptly to secure assets, and the fact that documents and information tend to be spread across different agencies of Government, the risk of material non-disclosure can never be eliminated when bringing corruption cases. However, serious and culpable non-disclosure of material information must be established, discharge is not automatic and the Court also has discretion to grant a fresh injunction in the event that the original is set aside.
Any applicant for a freezing injunction is under a duty to apply promptly on becoming aware of the facts giving rise to a claim and/or the risk of dissipation of assets. The rationale is obvious: the applicant is asserting that there is an urgent need for a freezing injunction. That contention is undermined by delay.
The duty to move quickly is often problematic in corruption cases. There are many reasons why a Government may move slowly: for example, the length of time needed to conduct investigations, lack of resources, lack of knowledge of the options available to it, bureaucracy and political resistance to bringing claims against present or former public officials. In general, delay is not a significant impediment to states obtaining a freezing injunction in corruption cases, but must be explained in full.
Cross-undertaking in damages
A state must undertake to compensate the defendant if a Court decides at a later stage that the injunction should not have been granted. Many applicants for an injunction need to provide security to support that promise, although this is unlikely to be required by a state, unless the claim is made by a state entity with limited assets.
Freezing injunctions are a potent weapon in asset recovery cases, and absolutely necessary to secure assets whilst a claim is pursued, unless criminal restraints are already in place. Care needs to be taken in producing the evidence to support an application for an injunction to avoid defendants being able to meaningfully argue that there has been a breach of the obligation of full and frank disclosure.