Frozen: Don’t Let It Go

One of the most effective and draconian powers of the English courts is the freezing order. These orders are injunctions that prevent the party against whom they are ordered from dealing with or disposing of its assets, usually up to a specified amount or value. The purpose behind a freezing order is to ensure that the assets in question remain available until an arbitral award or a court judgment can be enforced against the party in question. Because of the harm that such an order can cause, even a successful applicant must give an undertaking that it will be responsible in damages if, ultimately, it is found that the applicant was not entitled to the interim relief granted.

The High Court's power to grant a freezing injunction is remarkably wide. In principle, these interim remedies can be deployed not just against assets outside of the jurisdiction, but also against third parties who are not the defendant in the underlying claim, who own assets that are in fact beneficially owned by the defendant. Those third parties may again be resident outside of the jurisdiction, and have little or no connection with England. Even then, they may find that they are within the reach of the long arm of the English Courts. This article looks at recent decisions that highlight when and how freezing orders may be granted against parties or assets that are based abroad.

Freezing orders are an exceptional interim remedy

Freezing orders are not easily granted. Even though such an injunction is only an interim order, it will have real, and potentially drastic, impact on the party at the receiving end. As with any injunction, as an equitable remedy, granting a freezing order is always within the discretion of the High Court. The key question is whether making the order would be 'just and convenient' in the particular circumstances, as required by Section 37(1) of the Senior Courts Act 1981.

A freezing injunction is not a free-standing remedy. It must support a cause of action over which (either) the English court has jurisdiction itself, or which falls within the provisions empowering the English court to make orders in support of foreign litigation (found in Section 25 of the Civil Jurisdiction and Judgments Act 1982).

The late Lord Bingham summarised the principles governing freezing orders in Fourie v. Le Roux & Ors Rev 1 [2007] UKHL 1:

"Mareva (or freezing) injunctions were from the beginning, and continue to be, granted for an important but limited purpose: to prevent a defendant dissipating his assets with the intention or effect of frustrating enforcement of a prospective judgment. They are not a proprietary remedy. They are not granted to give a claimant advance security for his claim, although they may have that effect. They are not an end in themselves. They are a supplementary remedy, granted to protect the efficacy of court proceedings, domestic or foreign ...

In recognition of the severe effect which such an injunction may have on a defendant, the procedure for seeking and making Mareva injunctions has over the last three decades become closely regulated. I regard that regulation as beneficial and would not wish to weaken it in any way. The procedure incorporates important safeguards for the defendant. One of those safeguards, by no means the least important, is that the claimant should identify the prospective judgment whose enforcement the defendant is not to be permitted, by dissipating his assets, to frustrate. The claimant cannot of course guarantee that he will recover judgment, nor what the terms of the judgment will be. But he must at least point to proceedings already brought, or proceedings about to be brought, so as to show where and on what basis he expects to recover judgment against the defendant."

The applicant has to show 'a good arguable case'

The need to identify a prospective judgment (or award) which any freezing order would support puts the onus on the applicant to show that there is a 'good arguable case' against the defendant.

A 'good arguable case' does not, however, mean 'having much the better of the argument'. The threshold that the applicant has to cross is not 'a 51% of winning'. The Court of Appeal recently had occasion to review the approach that should be taken in this regard, in Kazakhstan Kagazy Plc v Arip [2014] EWCA Civ 381.

The claimants alleged a large-scale fraud and claimed damages of around $135 million. They obtained a freezing injunction against Mr Arip, the director of a company on whose watch the monies apparently disappeared, and who the claimants asserted must have been complicit. At the material time, Mr Arip was a director of the claimant company and of a subsidiary. These companies were alleged to have contracted with a purportedly independent construction company, for the development of two sites near Almaty. A total of $167.5 million was paid to the construction company, but only one site was ever developed. The one development that was built was valued at $25.32 million. The rest of the monies appeared to have been channeled to entities which the claimants believed were effectively controlled by the defendants, including Mr Arip, or their associates. The claimants also alleged fraud as regards the acquisition of a company for $39 million more than it was actually worth, with the purchase price having again been channeled into the hands of the defendants.

After a three-day hearing before the judge at first instance, the order was granted. The respondent then appealed. Mr Arip challenged the freezing injunction, after it had (in the usual manner) been granted in a without-notice application made by the claimants.

For the purposes of challenging the injunction, Mr Arip did not set out to explain what had happened, or how all of this might have been a misunderstanding. Instead, he accepted that, on its face, there was a good arguable case that the claimants had been defrauded in the manner that they alleged. He did, however, argue that he had a limitation defence under Kazakh law which defeated the claimants' case. To pursue this point, Mr Arip had to make the unattractive argument that, even if the fraud had occurred, the claimant companies ought to have been aware that they had been defrauded a lot sooner, and done something about - by pursuing Mr Arip within the three year period that Kazakh...