Freezing Orders: Applicants (including Liquidators) Face High Hurdle To Justify Cap On Cross-Undertaking In Damages

• Published date: 23 June 2023
• Law Firm: Herbert Smith Freehills
• Author: Ms Jan O'Neill

The Court of Appeal has set aside a freezing order obtained by a provisional liquidator within winding up proceedings, on the basis that the cross-undertaking in damages given by him was inadequate because it was limited to the amount recovered for the estate. The liquidator had not discharged the burden of showing good reason to depart from the "default position" that a cross-undertaking should be unlimited in amount: Hunt v Ubhi[2023] EWCA Civ 417.

A cross-undertaking in damages is a commitment given to the court by a party seeking an order, confirming that they will pay any amount the court might later consider appropriate to compensate for loss or detriment resulting from the order. It is effectively the price for being allowed to interfere with a defendant's freedom before they have been found liable for anything.

The decision provides useful Court of Appeal guidance as to the matters that any applicant for a freezing order who proposes a limited cross-undertaking should be prepared to address, supported by evidence to the extent possible. They include: whether there are other interested entities (such as creditors in an insolvency) who have a sufficient stake in the proceedings and the financial means to support an unlimited cross-undertaking; any other potential source of funding; the possibility of insurance; and the practical value of the proposed undertaking in the particular circumstances.

The decision is also of particular interest for the confirmation that the default position described above applies equally in an insolvency context, and the fact that an insolvency office holder is seeking the freezing order for the benefit of others will not on its own justify a cap on their cross-undertaking.

The Court of Appeal also identified a number of more fundamental issues (beyond the scope of this post) as to the operation of insolvency legislation in this context. In particular, it queried whether a provisional liquidator does in fact have the power to seek a freezing injunction within winding up proceedings, aimed at preventing an individual from frustrating a prospective statutory call to contribute to the debts of a partnership - as opposed to preserving identified assets of the partnership or safeguarding its ability to enforce a damages claim that constitutes a partnership asset. Those questions did not need to be decided in this case but were flagged by the court as needing careful consideration in a future case.

Background

The issue arose...