This chapter concerns the English courts’ power to grant interim injunctions preventing defendants from dissipating their assets (freezing orders). It explores how freezing orders may be used to aid enforcement of existing or future arbitration awards by preventing defendants from hiding or dissipating their assets to frustrate enforcement.
The English courts’ jurisdiction to grant orders covering both assets located in England and Wales and abroad (worldwide freezing orders (WFOs)) is now well established. The English courts’ willingness to support arbitration proceedings and to police asset dissipation via the grant of freezing orders is widely recognised and these are two of the many reasons why London is a popular choice of arbitration seat, especially with international parties.
The chapter provides an overview of:
A freezing order is a radical remedy, which has been described by the English courts as one of the nuclear weapons of the law [2] and is therefore treated with the utmost seriousness by the courts, as shown by the high evidential bar required to be surpassed before an order will be made.
Freezing orders (previously known as Mareva injunctions) are interim injunctions that restrain a defendant from disposing of or dealing with its assets, otherwise than in the ordinary course of business, up to a certain value. Freezing orders are typically used by arbitration claimants (applicants) who believe that the defendant is taking steps to hide its assets to frustrate enforcement of an award against them. As such, freezing orders are an extremely powerful weapon in a claimant’s armoury that can be used to assist enforcement of arbitration awards.
Significantly, freezing orders do not give applicants security over frozen assets and, therefore, obtaining such an order is not a substitute for proprietary remedies. [3] Nonetheless, freezing orders are useful not just in preserving assets but also because they typically contain ancillary disclosure obligations requiring the defendant to provide an affidavit setting out the value and location of its assets – information that is often invaluable when considering enforcement strategies.
The consequences attached to failing to comply with a freezing order are deliberately severe so as to encourage strict compliance. An individual who is personally served with a freezing order that has been endorsed with a penal notice, and who fails to comply with the terms of that order, could face contempt of court proceedings. If found to be in contempt of court, individuals could face criminal sanctions of a fine or imprisonment for up to two years (or both).
The freezing order has developed over time into a broad and flexible remedy. It is possible to obtain a freezing order over assets located within the jurisdiction or outside England (a WFO).
Freezing orders can be sought to support arbitration proceedings both pre-award and post-award and also in aid of domestic-seasted and foreign-seated arbitration proceedings. [4]
To obtain a freezing order from the English court, the applicant must establish that:
We take the most substantive of these requirements in turn.
The court has jurisdiction to grant a freezing order before or during an arbitration pursuant to Section 44 of the UK Arbitration Act 1996 (the Arbitration Act), which will provide the procedural legal framework to an arbitration with its seat’s legal location in England; for example, in London.
In relation to a freezing order sought post-award, there is some uncertainty as to whether the court’s jurisdiction arises from Section 44 of the Arbitration Act or Section 37 of the Senior Courts Act 1981. In light of this uncertainty, when seeking such an order, it is advisable to apply under both provisions. [5]
The court cannot grant a freezing order before an arbitral award is obtained if the relevant contract or arbitration rules contain a clause stating that obtaining an arbitral award is a condition precedent to the right to bring further legal proceedings. This type of clause is known as a Scott v. Avery clause, after the first case to consider such a provision. Scott v. Avery clauses are found in certain standard form arbitration rules; for example, the terms of a Federation of Oilseeds and Fats Associations (FOSFA) contract include such a provision and, therefore, a freezing order can only be sought in aid of a FOSFA arbitration after the award has been published. [6]
Prior to the judgment in Broad Idea International Ltd v. Convoy Collateral Ltd, [7] it was understood that the applicant must have a good arguable underlying case against the defendant.
The requirement to prove a ‘good arguable case’ on the underlying dispute has been described as ‘not a particularly onerous one’. [8] In The Niedersachsen, [9] Lord Justice Mustill described the test as meaning ‘a case which is more than barely capable of serious argument and yet not necessarily one which the judge believed to have a better than 50 per cent chance of success’. The ‘good arguable case’ criterion is automatically satisfied when applying for a freezing order post-award.
However, the decision of the Privy Council in Broad Idea has introduced significant changes. In that case, Lord Justice Leggatt held that (1) there was no reason, in principle, to link the grant of a freezing order to a cause of action; and (2) there was no reason why the right to bring the relevant proceedings should have arisen or for the relevant proceedings to have been commenced. [10]
The fourth criterion listed above, demonstrating ‘a real risk of dissipation’, is often the most difficult to satisfy.
The applicant must adduce evidence that there is a real risk, judged objectively, that the award will not be enforced because of unjustifiable dissipation of assets. ‘Solid evidence’ is required [11] and the burden is on the applicant to satisfy this threshold criterion. If there is more than one defendant, the risk must be established against each defendant.
Although each case turns on its own facts, relevant factors could include: plans to reorganise a business and move assets out of the United Kingdom; [12] fraudulent behaviour and dishonesty of relevant persons controlling assets; [13] or assets held in offshore entities or trusts that could easily be disposed of. [14] When considering ‘real risk of dissipation’, the court may also consider the defendant’s conduct with respect to payment. For example, in previous cases, the courts have been willing to give weight to patterns of evasive behaviour [15] or promises to pay followed by persistent defaults with implausible excuses. [16]
Previous dishonest conduct may not be sufficient to satisfy the criteria, and it must be shown that the dishonesty points towards a risk of dissipation. Similarly, the court has emphasised that the use of offshore structures could fulfil legitimate business purposes and, therefore, such a structure does not, without more, equate to a risk of dissipation. [17]
The court imposes hard edges to the scope of the potentially draconian relief offered by freezing orders. Significantly, these orders do not prevent the defendant from disposing of its assets in the ordinary course of business, or prevent funds being used in relation to reasonable living expenses, or reasonable legal costs. As the court clarified in Lakatamia Shipping Co Ltd v. Toshiko Morimoto, [18] the purpose of a freezing order is not to provide general security for a claim, nor to prevent a defendant from operating its business in a legitimate way.
In JSC BTA Bank v. Ablyazov (No. 3), [19] the Court of Appeal of England and Wales stated that the ordinary course of business exception should be narrowly construed. Equally, in Organic Grape Spirit Ltd v. Nueva IQT, SL, [20] the Court of Appeal allowed an appeal against a provision in a WFO that prevented the defendant from creating a new start-up business. The Court clarified that a transaction or business should not be prohibited merely because it involves (even substantial) risk or speculation.
In Vneshprombank LLC v. Bedzhamov and others, [21] the Court of Appeal considered what amounted to reasonable living expenses in the context of a high net worth individual, who sought to carve out from the scope of the freezing order monthly living expenses of £310,000. The Court clarified that the correct approach is to allow a figure for living expenses that enables the defendant to maintain their previous ordinary living expenses and their previous standard of living. The purpose of the order is not to operate oppressively.
Obtaining a freezing order is typically a two-stage process.
First, the applicant applies for an order without notice to the defendant, to avoid tipping them off. Second, if the order is granted at the without-notice hearing, the court will set a return date for an on-notice hearing, at which the defendant will have the opportunity to argue against the order being maintained.
To apply for a freezing order in aid of an arbitration, the applicant must file (1) an arbitration claim form, (2) an application notice and draft order, (3) a sworn affidavit setting out the evidence in support of the relief sought, and (4) a skeleton argument. [22] When a case is so urgent that it is not possible to swear an affidavit, an applicant may file an unsworn document together with an undertaking to file a sworn document in due course.
On receipt of the documents, the court will fix an urgent without-notice hearing. If the application is successful, the court will make the order and fix a return date. In the Commercial Court, the return date is usually 14 days after the injunction is granted, particularly if the parties are outside the jurisdiction. [23]
Prior to the return date, the applicant must serve the defendant with the freezing order, a summary of the hearing, copies of all other documents filed at the court and the defendant’s response pack. The applicant can also choose to notify the defendant’s banks and trading partners about the order to prevent assets being dissipated.
At the following hearing, the defendant will have the opportunity to oppose the continuation of the freezing order. The court will either order the continuation of the relief or order that the case is dismissed.
Parties should be aware that every applicant is required to give the court an undertaking that it will compensate the defendant for any loss suffered if it is later established that the order should not have been granted. The court can require that the undertaking in damages is supported (fortified) by, for example, a payment into court. Only in limited circumstances, such as when the applicant shows it is highly creditworthy, may the court choose to dispense with the requirement for fortification of the undertaking.
Parties should also be aware that if the application is made without notice, the applicant has a duty to give full and frank disclosure. This means that factors that are adverse to the applicant’s case must be disclosed. The duty of full and frank disclosure also extends to making proper enquiries before making the application and, therefore, the applicant must disclose not only what it knows but also what it should have known had it made proper enquiries. [24]
If the application is urgent, less extensive enquiries may be justified; however, applicants would be best advised to err on the side of caution, as failure to provide full and frank disclosure risks the freezing order being discharged at the subsequent hearing and an adverse costs order being made.
The English courts have jurisdiction to make freezing orders in aid of arbitrations seated in England under Section 44 of the Arbitration Act, provided the parties have not agreed to exclude these powers. Under the Act, the court is able to ‘make such orders as it thinks necessary for the purpose of preserving evidence or assets’ but can only do so (1) in circumstances where relief is sought urgently, (2) with the permission of the tribunal or the other party, or (3) if the tribunal ‘has no power or is unable . . . to act effectively’. [25]
When the relevant criteria are satisfied, the English courts are generally willing to grant a freezing order in aid of an England-seated arbitration. In U&M Mining Zambia Ltd v. Konkola Copper Mines Plc, [26] Mr Justice Teare held that it will ‘ordinarily be appropriate for [the English courts] to issue orders in support of the arbitration’. In that case, most of the defendant’s assets were located in Zambia, where enforcement would take place, and the Zambian courts also had the power to grant a freezing order. These factors were not sufficient to convince the English court to decline to grant the relief sought.
The English court also has the power to grant freezing orders in aid of arbitration proceedings seated outside England, but only where it concludes that the fact of the foreign seat does not make it inappropriate to do so. [27]
The English court operates from the initial presumption that the courts of the seat of the arbitration will be the natural forum for any interim relief. [28] Therefore, the English court will generally only be prepared to exercise its discretion to grant a freezing order in aid of an ongoing foreign-seated arbitration when the dispute has a sufficiently strong link with England. [29] Any proposed order will be strictly scrutinised to limit the possible trespass into a foreign court’s jurisdiction and to preserve concepts of judicial comity. Generally, the intervention of the English court in aid of a foreign-seated arbitration may be justified when:
In TSB Private Bank International SA v. Chabra, [31] the court, for the first time, held that a freezing order could be made against a third party (that is a person against whom the claimant had no claim) who appeared to hold assets on behalf of the defendant. This is known as Chabra jurisdiction.
Parties should remember that they must be able to serve the relevant defendant with the arbitration claim form and, if necessary, obtain the court’s permission to serve the claim form outside the jurisdiction. In Cruz City 1 Mauritius Holdings v. Unitech Ltd and others, 32 the court appeared to limit the scope of Chabra jurisdiction in relation to proceedings sought in aid of enforcement of an arbitration award. The court held that the jurisdictional gateways under the English Civil Procedure Rules [33] did not apply in relation to a freezing order sought against non-parties outside the jurisdiction. Lord Justice Males emphasised that it was important to assist in the enforcement of arbitration awards; however, he stopped short of construing junctional gateways in such a way as to ‘extend their scope beyond their proper bounds’.
With effect from 1 October 2022, there is a new jurisdictional gateway in the Civil Procedure Rules concerning information orders against non-parties, [34] which will be of assistance to parties faced with complex cross-border fraud cases, where information is needed from third parties outside the jurisdiction.
In the context of WFOs, the court has also been willing to grant an order against persons unknown in the context of fraud. [35] In that case, the court also allowed alternative service via unusual methods, including WhatsApp, Facebook messenger and an online data room.
The efficacy of a WFO from the English courts depends to a large extent on whether courts outside England and Wales are willing to enforce their terms.
The standard form freezing order found in Practice Direction 25 of the Civil Procedure Rules contains the proviso that the applicant will seek the permission of the English court before any steps are taken to enforce the order in another jurisdiction. [36] Before applying for a WFO, an applicant will wish to consider seeking permission to enforce in the other relevant jurisdictions to avoid the delays associated with a subsequent application. [37]
Freezing orders from an English court can be enforced by the courts of other jurisdictions. However, there are some jurisdictions where this approach might be more complex; for example, in Switzerland, interim orders of the English court were previously enforceable pursuant to the Lugano Convention. [38] However, post-Brexit, the United Kingdom is no longer a signatory to the Lugano Convention and, therefore, recognition and enforcement falls to be determined under the Swiss Federal Act on Private International Law (PILA). Although the position with respect to enforcement of English court freezing orders remains uncertain and controversial, the prevailing view is that interim measures are not enforceable under PILA owing to their lack of finality.
In circumstances where there is uncertainty as to whether a freezing order made by an English court will be enforced by a court in another jurisdiction, an applicant may do better by seeking relief directly from the foreign court.
The English courts’ freezing order continues to be a nuclear weapon in the arsenal of a party seeking to preserve assets in aid of arbitration proceedings or to enforce an award. The English courts’ continued willingness to grant these orders underlines their robust support for arbitration and party autonomy in that method of dispute resolution.
Recent decisions continue to demonstrate that the English courts are willing to develop the law and practice around freezing orders to ensure that they remain relevant and respond to the needs of the parties, by continuing to offer a flexible interim remedy in support of England-seated arbitrations and also in aid of ongoing foreign-seated arbitrations. That being said, the freezing order and its international relation, the WFO, are relatively rare outside the English jurisdiction.
[1] Damian Honey is a partner, Nicola Gare is knowledge counsel and Caroline West is a senior associate at Holman Fenwick Willan LLP.
[2] Bank Mellat v. Nikpour [1985] FSR 87 (CA), 92 (Donaldson LJ).