Asset freezing

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Asset freezing is a legal process which prevents a defendant to an action from dissipating their assets from beyond the jurisdiction of a court so as to frustrate a potential judgment. It is widely recognised[citation needed] in other common law jurisdictions and such orders can be made to have world-wide effect. It is variously construed as part of a court's inherent jurisdiction to restrain breaches of its process.

Origins in Mareva[edit]

The legal order itself is in the form of an injunction, which in Commonwealth jurisdictions is also known as a freezing order, Mareva injunction, Mareva order or Mareva regime, after the case Mareva Compania Naviera SA v International Bulkcarriers SA,[1] although the first recorded instance of such an order in English jurisprudence was Nippon Yusen Kaisha v Karageorgis,[2] decided one month before Mareva. The Civil Procedure Rules 1998 now define a Mareva injunction as a "freezing order".

Asset freezing is not a security,[3] nor a means to pressure a judgment debtor,[4] nor is it a type of asset forfeiture since it does not confer upon anyone else a proprietary interest in the defendant's assets.[5] However, some authorities have treated the Mareva injunction as an order to stop a judgment debtor from dissipating his assets so as to have the effect of frustrating judgment, rather than the more strenuous test of requiring an intent to abuse court procedure. An example of the former would be paying off a legitimate debt,[6] whereas an example of the latter would be hiding the assets in overseas banks on receiving notice of the action.

A freezing order will usually only be made where the claimant can show that there was at least a good arguable case that they would succeed at trial and that the refusal of an injunction would involve a real risk that a judgment or award in their favour would remain unsatisfied.[7] It is recognised as being quite harsh on defendants because the order is often granted at the pre-trial stage in ex parte hearings, based on affidavit evidence alone.

A Mareva injunction is often combined with an Anton Piller order in these circumstances. This can be disastrous for a defendant as the cumulative effect of these orders can be to destroy the whole of a business' custom by freezing most of its assets and revealing important information to its competitors, and the two orders have been described by Lord Donaldson as being the law's "nuclear weapons."[8][9]

Current scope of freezing order[edit]

In 2007, Lord Bingham declared:

In Group Seven,[11] Hildyard J outlined the current scope of freezing orders that can be issued by the Court:

  1. It is designed to prevent injustice to a successful claimant by preserving assets and funds from being disposed of or dissipated before a judgment is satisfied.
  2. "His assets" refers to "assets belonging to that person, not to assets belonging to another person" and without words clearly extending the scope of the phrase "his assets", assets owned beneficially by someone else will not be subject to the freezing order.
  3. A freezing order is a precautionary measure taken urgently to protect the claimant against the risk of dissipation, disposal, reduction in value, or loss of assets pending a fuller examination as to what assets would in reality be available to the claimant for the purposes of enforcing a judgment.
  4. If the words are ambiguous, or admit of a more restrictive interpretation, so that it is arguable whether or not the assets in question fall within their scope, the court is unlikely to treat a dealing with such assets as a contempt of court.
  5. "Assets" also covers assets which are not in the legal ownership of the defendant but in respect of which the defendant "retains the power to direct how the assets should be dealt with."
  6. The phrase "his assets" is extended to include also "assets held by a foreign trust or a Liechtenstein Anstalt when the defendant retains beneficial ownership or effective control of the asset."
  7. It is clear that those words in the standard form do not extend to assets of which the defendant remains the legal owner but holds for the benefit of someone else.
  8. If it is desired and found appropriate to extend the scope of the injunction to assets held in trust (in the case of a façade or sham), additional wording must be included to make that clear, and the Court will only do this sparingly.
  9. As to piercing or lifting the corporate veil, ownership and control of a company are not themselves sufficient to provide justification for that course, even when no unconnected third party is involved and it might be perceived that the interests of justice would be served by it.
  10. Even where the circumstances are such as to justify the exceptional step of piercing or lifting the corporate veil, the effect is not to alter the beneficial ownership of the company's assets: it is simply to provide for such asset to be available in defined circumstances to the claimant.

In 2014, Lakatamia[12] emphasized that the assets of a company wholly owned by a person subject to a freezing order are not automatically subject to the order. In that case, Rimer J noted:

However, the person's shares in the company are subject to it, and any conduct by him (not in the course of ordinary business) that diminishes the value of those shares will infringe that order.[14]

Chabra relief[edit]

Subsequent jurisprudence[15] has extended the reach of freezing orders to third parties against whom there is no substantive cause of action, but where there is good reason to suppose that their assets may in truth be the assets of the defendant against whom a cause of action is asserted. This type of order is known as Chabra relief, and has been described as possessing certain characteristics:[16]

  1. It may be exercised where there is good reason to suppose that assets held in the name of a defendant against whom the claimant asserts no cause of action (the NCAD) would be amenable to some process, ultimately enforceable by the courts, by which the assets would be available to satisfy a judgment against a defendant whom the claimant asserts to be liable upon his substantive claim (the CAD).
  2. The test of "good reason to suppose" is that of a good arguable case.
  3. The jurisdiction will be exercised where it is just and convenient to do so.
  4. Assets will be treated as in truth the assets of the CAD if they are held as nominee or trustee for it as the ultimate beneficial owner.
  5. Substantial control by the CAD over the assets in the name of the NCAD is often a relevant consideration, but substantial control is not the test for the existence and exercise of the Chabra jurisdiction. It is relevant where there is a question of beneficial ownership, and where there is a real risk that assets may be dissipated in the absence of a freezing order.

Extension to EU[edit]

Similar provision can be found in the exercise of:

It has been extended to other members of the European Union, by virtue of Article 9(2) of the Directive on the enforcement of intellectual property rights.[18] In January 2017, a uniform European Account Preservation Order will be implemented in all EU member States (other than Denmark and the United Kingdom).[19]

Extrajudicial application: "Mareva by letter"[edit]

Informal de facto freezing may also be undertaken in most common law jurisdictions by a third-party guardian or assetholder, where he has been informed that those assets are imposed with a constructive trust in favour of someone other than the apparent owner. The freeze may be effected by issuing a letter to the asset holder or guardian in question, informing them of the true origin or beneficial ownership of the targeted funds or assets, and advising them of their potential accessory civil and possible criminal liability in the event of any transfer or disposal of the assets in question. Such devices may be employed in cases where a victim of fraud suspects that targeted funds or assets may be transferred to another location where it might be impractical to gain access to them. However, the use of this technique within the United States is not generally accepted.[20]

Further reading[edit]

  • Harris Bor (2014). "Freezing orders in support of arbitration proceedings". Journal of International Banking and Financial Law (Butterworths) 29 (1): 43–45. ISSN 0269-2694. 

See also[edit]

References[edit]

  1. ^ Mareva Compania Naviera SA v International Bulkcarriers SA, [1975] 2 Lloyd's Rep 509 (C.A. 23 June 1975). , [1980] 1 All ER 213
  2. ^ Nippon Yusen Kaisha v Karageorgis, [1975] 1 WLR 1093 (C.A.). , [1975] 3 All ER 282
  3. ^ Jackson v Sterling Industries Ltd [1987] HCA 23, (1987) 162 CLR 612 (11 June 1987)
  4. ^ Camdex International Ltd v Bank of Zambia (No. 2), [1997] 1 WLR 632.
  5. ^ Cretanor Maritime Co Ltd v Irish Marine Management Ltd, [1978] 1 WLR 966.
  6. ^ Iraqi Ministry of Defence v Arcepey Shipping Co. S.A. ("The Angel Bell"), [1981] 1 QB 65.
  7. ^ Ninemia Maritime Corporation v Trave Schiffahrtgesellschaft mbH und Co KG ("The Niedersachsen"), [1983] 1 WLR 1412.
  8. ^ Bank Mellat v Nikpour, [1985] FSR 87
  9. ^ Hefin Rees (8 December 2009). "Freezing Injunctions: A Nuclear Weapon For the Commercial Litigator". Hefin Rees. par. 2. 
  10. ^ Fourie v. Le Roux & Ors [2007] UKHL 1 at para. 2, [2007] 1 All ER 1087 (24 January 2007)
  11. ^ Group Seven Ltd v Allied Investment Corporation Ltd & Ors [2013] EWHC 1509 (Ch) at para. 63 (6 June 2013)
  12. ^ Lakatamia Shipping Company Ltd v Su & Ors [2014] EWCA Civ 636 (14 May 2014)
  13. ^ Lakatamia, par. 51
  14. ^ Lakatamia, par. 43, 53
  15. ^ T.S.B. Private Bank International SK v Chabra, [1991] 1 WLR 231.
  16. ^ PJSC Vseukrainskyi Aktsionernyl Bank v Maksimov & Ors, [2013] EWHC 422 (Comm), mentioned at Lakatamia, par. 32
  17. ^ May Lee (1982). "Prejudgment Attachment in England: The Mareva Injunction". Loyola of Los Angeles International and Comparative Law Review (Loyola Marymount University) 5 (1): 143. 
  18. ^ Directive 2004/48/EC of 29 April 2004 on the enforcement of intellectual property rights
  19. ^ "The new European account preservation order - A nightmare for defendants and a litigant's dream?". Allen & Overy. , discussing Regulation (EU) No 655/2014 of 15 May 2014 establishing a European Account Preservation Order procedure to facilitate cross-border debt recovery in civil and commercial matters
  20. ^ Martin S. Kenney (27 November 2006). "Mareva by Letter: Preserving Assets Extra-Judicially — Destroying a Bank's Defence of Good Faith by Exposing it to Actual Knowledge of Fraud.". martindale.com.