When a court grants a freezing injunction, its order will be based in large part upon the “standard form” freezing injunction wording. There are, however, two sets of standard form wording which a claimant can use.1 Depending upon which one is used, a claimant may be able to freeze a respondent’s assets even if the assets are held on trust for a third party. This issue and its implications for trustee respondents was considered in JSC BTA Bank v Kythreotis.2
The standard wordings
Paragraph 5 of the standard form freezing order3
“Until the return date or further order of the court, the Respondent must not remove from England and Wales or in any way dispose of, deal with or diminish the value of any of his assets which are in England and Wales up to the value of £X.”
What does “his assets” mean:
– under the Civil Procedure Rules Part 25 (paragraph 6 of PD25A)
“Paragraph 5 applies to all the Respondent’s assets whether or not they are in his own name whether they are solely or jointly owned. For the purpose of this order the Respondent’s assets include any asset which he has the power, directly or indirectly, to dispose of or deal with as if it were his own. The Respondent is to be regarded as having such power if a third party holds or controls the asset in accordance with his direct or indirect instructions.”
– under the Commercial Court Guide (paragraph 6 of CCG A5)
“Paragraph 5 applies to all the Respondent’s assets whether or not they are in his own name, whether they are solely or jointly owned [and whether the Respondent is interested in them legally, beneficially or otherwise]. For the purpose of this order the Respondent’s assets include any asset which he has the power, directly or indirectly, to dispose of or deal with as if it were his own. The Respondent is to be regarded as having such power if a third party holds or controls the asset in accordance with his direct or indirect instructions.”
When will it be appropriate to freeze Trust Assets?
The fundamental premise of a freezing injunction is that those who are alleged to have committed a fraud, or have knowingly received proceeds of a fraud, should not be entitled to dissipate funds which would otherwise be available to a successful claimant.
The Court’s jurisdiction to order a freezing injunction is exercised in a “flexible and adaptable manner”.4 Over time, the standard form wordings for freezing injunctions have developed to include mechanisms aimed at preventing a respondent from evading the effect of the order. For instance, the freezing injunction does not just prevent the respondent from dealing only with assets in his name; the respondent is also precluded from dealing with assets he holds jointly, and assets which he owns beneficially (ie even if the legal title to the asset is in another person’s name).
However, until recently, the standard form wordings did not provide complete protection to a claimant if a respondent established sham trusts.5 In a situation where a respondent held legal title to an asset, but did not beneficially own the asset, and the respondent maintained that he held the asset on trust for a third party who was not involved in the alleged fraud (a Trust Asset), a claimant would ordinarily not be entitled to freeze the Trust Asset. It is not uncommon for fraudsters to route the proceeds of their fraud through one or more offshore trusts: such a process can be tax effective and protects the confidentiality of the beneficiaries of the trust. It is therefore a small and easy step for a fraudster to try to defeat the purpose of any anticipated freezing injunction by setting up a trust where he is the trustee, and the beneficiaries are “innocent” third parties.6
In Kythreotis, the Court of Appeal recognised the unsatisfactory position of the law and held that the new Commercial Court Guide wording entitled a claimant to freeze Trust Assets. This finding, which prioritises substance over form, is consistent with the approach taken in cases where there is a live issue as to whether someone who is effectively an innocent third party should be subject to a freezing injunction.7
In this context, the courts have recognised that a third party can be subject to a freezing injunction even if the primary respondent to the freezing injunction has no legal or equitable right to the assets in question but has some right in respect of, or control over, the assets in question.8
The Court of Appeal did, however, emphasise that freezing Trust Assets should be done sparingly following careful consideration of the facts and circumstances of each case.9 The court stated that any claimant seeking to freeze Trust Assets should bear mind the following:10
- The finding did not alter the underlying principles which would justify the grant of a freezing injunction: the sole purpose of a freezing injunction is to prevent a respondent from dissipating assets which would otherwise be available to meet any judgment.
- Trust Assets should be the subject of a freezing order only if there are proper grounds to believe that those assets belong beneficially to a respondent to a freezing order, notwithstanding that they are ostensibly held by a respondent on trust or as nominee for a third party.
If Trust Assets are to be frozen, the impact of the order upon the apparent beneficial owner of the assets should be minimised. This would include:
- Extending the claimant’s cross-undertaking in damages to cover the beneficial owner of the Trust Assets where the injunction was subsequently varied or discharged in respect of the Trust Assets; and
- Hearing any challenge to the order by a beneficiary as to the beneficial title to the assets on an expedited basis.
The Kythreotis decision is good news for claimants who consider that their assets or funds which would otherwise be available to satisfy a judgment have been buried in sham trusts. However, it may come at too high a price for claimants given the likely scope of the cross undertaking in damages which they will need to provide.