Asset freezing


Asset freezing is a form of interim or interlocutory injunction which prevents a defendant to an action from dealing with or dissipating its assets so as to frustrate a potential judgment. It is widely recognised 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''

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 1975 case Mareva Compania Naviera SA v International Bulkcarriers SA, although the first recorded instance of such an order in English jurisprudence was Nippon Yusen Kaisha v Karageorgis, decided one month before Mareva. The Civil Procedure Rules 1998 now define a Mareva injunction as a "freezing order".
In England and Wales, the jurisdiction to issue an asset freezing order arises in part from the Judicature Act 1873, which provided that "A mandamus or an injunction may be granted or a receiver appointed by an interlocutory Order of the Court in all cases in which it shall appear to the Court to be just or convenient". Relying on this, Jessel MR in 1878 declared, "I have unlimited power to grant an injunction in any case where it would be right or just to do so".
Asset freezing is not a security, nor a means to pressure a judgment debtor, nor is it a type of asset forfeiture since it does not confer upon anyone else a proprietary interest in the defendant's assets. 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, 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. 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.
To prevent potential injustice and abuse of the court's powers in an ex parte proceeding, moving parties are required to provide full and frank disclosure at such proceeding. The moving party must make a balanced presentation of the facts and law, including all relevant facts and law which may explain the respondent's position if known to the moving party, even if such facts would not have changed the court's decision. If the court is misled on a material fact, or if there is less than full and frank disclosure, the court will typically not continue the injunction.
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".
A motion for Mareva injunction is also frequently brought together with a Norwich Pharmacal order, or more commonly known as a tracing order. A Norwich Pharmacal order is form of pre-action discovery that allows an aggrieved party to trace otherwise hidden or dissipated assets, with a view to their preservation.

Application

While it is not advisable to obtain such an order on purely strategic grounds, asset freezing has a persuasive effect on settlement negotiations. While a claimant obtaining an order can expect to face subsequent opposition in court from the defendant, the freezing order is generally considered to be the beginning of the end for the defendant as they will be unable to defend themselves with very limited or no available income. The claimant will have no restrictions on legal fee spending, putting huge financial pressure on the defendant, and negotiation and settlement avoid the return to court.
In many jurisdictions, freezing injunctions brought ex parte are only granted for a very short period, usually a few days. At the end of this period, the moving party is required to return to court to justify the continuance of the injunction, this time with notice to the opposing party, so as to allow the latter a chance to contest the injunction on its merits.
Current orders issued by the court do not generally call for a blanket freezing of assets, and they are currently worded in more nuanced terms according to the situation concerned.
The process is regarded as a high-stakes exercise for several reasons:
  1. The application is almost always made without notice, to prevent the fraudster defendant from spiriting away their assets before the freezing order is granted. Applicant's counsel is therefore required to make full and frank disclosure of all material facts, and the applicable law, to the court.
  2. As with most injunctions, the applicant must provide an undertaking to the court to compensate the defendant for any damage caused by the order.
  3. A freezing order that is improperly or sloppily obtained, or one that is drafted too broadly or imprecisely, will cost the party, and its counsel, heavily in terms of credibility with the court.

    Extension to EU

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 of the Directive on the enforcement of intellectual property rights. Since January 2017, a uniform European Account Preservation Order has been implemented in all EU member states.

United States

Mareva was rejected by the Supreme Court of the United States in 1999 in Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc. For the majority, Justice Scalia held that, as such jurisdiction did not exist at the time of the passage of the Judiciary Act of 1789, the federal courts had no authority to exercise it. In dissent, Justice Ginsburg asserted that the federal courts' exercise of its equity jurisdiction was never that static. While Grupo Mexicano is consistent with other Supreme Court jurisprudence in the matter of preliminary injunctions, there has been debate as to whether this decision should be reversed.
At the state level, the New York Court of Appeals reached a similar conclusion to that of the Supreme Court in 2000, in Credit Agricole v. Rossiyskiy.
In place of Mareva, US civil jurisprudence relies more on prejudgment writs of attachment, preliminary injunctions and temporary restraining orders, which have a more limited scope of application.

Nature of order

Although it is mistakenly believed that a freezing injunction provides security over the defendant's assets for a possible judgment, or secures a judgment already obtained, Lord Donaldson MR explained in Polly Peck International Plc v Nadir that such is not the case:
In 2007, Lord Bingham declared:

Current scope

In Group Seven, 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, 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 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 that diminishes the value of those shares will infringe that order.