A key attraction of the English legal system is the ability of its civil courts to grant worldwide freezing injunctions. As it says on the tin, these are orders which seek to protect a claimant by preventing the defendant from dealing with its assets pending the outcome of the proceedings.
Freezing injunctions can be incredibly effective but they are not granted lightly and the court will need to see solid evidence that, without the injunction, it is likely that the defendant would try to transfer or conceal assets with a view to putting them out of the claimant's reach.
This is known as the risk of dissipation and in a recent High Court decision (PJSC National Bank Trust v Mints) Mr Justice Jacobs has helpfully clarified the legal principles to applied when considering whether such a risk exists. The judgment will be a useful reference point therefore for anyone looking to obtain a freezing injunction, particularly in support of a claim based on fraud allegations.
The facts of the case
The claimants were Russian banks which took over significant secured loans which had previously been provided to a group of companies ultimately controlled by the four individual defendants. The essence of the claim is that the defendants fraudulently swapped those secured loans for illiquid corporate bonds worth only a small fraction of the value of the loans. The banks contended therefore that there was an unjustified, dishonest and unlawful devaluing of the security that they held and that there was no honest explanation for swapping the valuable and secured loans for the bonds in question.
On the banks' application, the court granted a worldwide freezing injunction against the assets of the defendants (who were by then resident in England). The defendants then sought to have the injunction discontinued on the grounds, amongst other things, that the banks had not made out a sufficient case that there was a risk of dissipation.
Mr Justice Jacobs dismissed the defendants' challenge and held that the freezing injunction should continue. In particular, he confirmed that the banks had provided solid evidence of a risk of dissipation by the defendants of their assets. In doing so, the judge confirmed that the applicable legal principles (as identified in previous case law) included the following:
- The claimant must show a real risk, judged objectively, that a future judgment would not be met because of an unjustified dissipation of assets. In this context dissipation means putting the assets out of reach of a judgment whether by concealment or transfer.
- The risk of dissipation must be established by solid evidence; mere inference or generalised assertion is not sufficient.
- The risk of dissipation must be established separately against each defendant.
- It is not enough to establish a sufficient risk of dissipation merely to establish a good arguable case that the defendant has been guilty of dishonesty; it is necessary to scrutinise the evidence to see whether the dishonesty in question points to the conclusion that assets are likely to be dissipated. It is also necessary to take account of whether there appear to be properly arguable answers to the allegations of dishonesty. What must be threatened is unjustified dissipation. The purpose of a freezing order is not to provide the claimant with security; it is to restrain a defendant from evading justice by disposing of or concealing assets otherwise than in the normal course of business in a way which will have the effect of making it judgment proof.
- A freezing order is not intended to stop a corporate defendant from dealing with its assets in the normal course of its business. Similarly, it is not intended to constrain an individual defendant from conducting his personal affairs in the way he has always conducted them, providing of course that such conduct is legitimate. If the defendant is not threatening to change the existing way of handling their assets, it will not be sufficient to show that such continued conduct would prejudice the claimant's ability to enforce a judgment.
- Each case is fact specific and relevant factors must be looked at cumulatively.
Other relevant points
In his decision, the judge also made the following points which are again relevant to parties applying for a freezing injunction:
- When considering a risk of dissipation, it is legitimate to look at the actions of those who control a corporate entity; evidence that a company has dissipated assets may constitute relevant evidence of a risk of dissipation against those who control the company.
- Whilst a court may be reluctant to grant an injunction if the claimant can only point to dissipatory transactions of some antiquity, there is no requirement for an applicant to be able to identify recent evidence demonstrating a risk of dissipation. Rather, the evidence must be considered as a whole and the question will ultimately be whether or not solid evidence of a risk of dissipation exists.
- The mere fact of a delay in bringing an application for a freezing injunction will not in itself mean there is no risk of dissipation. A delay may though indicate (i) that the applicant does not have a genuine belief in the risk of dissipation (ii) that an injunction would be futile because there would be "nothing left in the stable" by the time the application was made or (iii) there was no risk of dissipation because the defendant had not already availed himself of the opportunity to conceal or transfer assets.
We have extensive experience in advising our clients on fraud claims and injunctions. If you would like advice on these issues or would simply like further information about the matters raised in this article then please contact me -firstname.lastname@example.org or 01392 685284.