Freezing orders in England and Wales

When will an application for a freezing order be made?

An application for a freezing order is most often made prior to court proceedings being issued. An application prior to proceedings can protect assets if the applicant fears that the other party will dispose of those assets before a judgment can be obtained.

However, a freezing order can also be sought during the course of proceedings or even after judgment is given, to prevent the disposal of assets before the judgment is enforced.

Post-judgment freezing orders have become more commonplace in recent years and are a valuable tool as an aid to enforcement. The purpose of a post-judgment freezing order is to ensure that a judgment debtor will not dissipate its assets to avoid enforcement. At a post-judgment stage, freezing orders are generally easier to obtain with a positive judgment in favour of the applicant. This is because the merits threshold of the legal test for granting a freezing order - on which, see further below - will likely already be satisfied by a positive judgment.

A freezing order can also be sought in support of arbitration proceedings. Where the seat of the arbitration is in England, an English court could order a freezing order over those assets to support enforcement of the award.

In special circumstances, a freezing order could be sought in respect of overseas proceedings. An applicant will have to show the presence of relevant assets in the English jurisdiction or a sufficient connection between the respondent and the UK.

Who is subject to a freezing order?

A freezing order will take effect personally against the party subject to it as long as they have notice of it. A freezing order may be made against a potential defendant or a third party holding assets on behalf of the potential defendant. The third parties could include a bank or a trustee.

Freezing orders can also be granted against “persons unknown” in the context of stolen crypto assets, where the identity of the person subject to the order is not known to the applicant.

When will the court grant a freezing order?

The court has a wide discretion to grant a freezing order, and will do so only when it considers that it is just and convenient. The following conditions must be satisfied:

• the English court must have jurisdiction;
• the applicant will usually have a cause of action – this could include a claim in deceit or breach of trust (a counterclaim will also be sufficient);
• the applicant must demonstrate to the court that it has a good arguable case on the merits. Although the applicant does not need to show that the case will definitely succeed, the court will give due consideration to the strength of any defence. The merits threshold was recently clarified by the Court of Appeal to mean that any application must meet the threshold of there being a ‘serious issue to be tried’ as required by other interim injunction applications;
• the applicant must have have grounds for believing that sufficient assets which the respondent has control over are in existence to meet the claim;
• there must be a real risk that the assets will be dissipated unless the order sought is granted. For this, those applying for freezing orders must ensure that they can demonstrate that there is solid evidence indicating that the assets may be dissipated in the future. Mere suspicion, fear and speculation based on past behaviour will unlikely be sufficient to establish a real risk on its own. The court will assess the risk of dissipation by considering all relevant factors and the cumulative impact of the factors taken together; and assets; and
• the applicant must provide an undertaking to the court to pay any damages to the other party if it is later shown that the order should not have been granted (see below).

When making its decision the court will apply the 'balance of convenience' test. The court will take all relevant factors into account and will weigh the damage caused to the respondent against the benefit to be gained by the applicant. The applicant's behaviour will also be considered and it must act reasonably and diligently.

It is very important for the applicant to act quickly when bringing an application for a freezing order. Any delay in applying for a freezing order will make it more difficult to convince the court that the order is necessary, where it is sought at a preliminary stage of proceedings. Delay also increases the risk that the assets in question will already have been dissipated by the time any order is granted.

In the context of post-judgment freezing orders, delay is viewed differently. For example, typically, the courts have taken the approach that a delay in making the application until after judgment will not be a reason to decline the application as long as the delay has not prejudiced the respondent.

Cross-undertaking in damages

The applicant must undertake to the court that it will pay any damages that the respondent suffers under the freezing order if it is later determined that the order should not have been granted. As a freezing order is a remedy which places dramatic restrictions on a respondent's assets, the undertaking provides comfort to the court that the respondent's position is sufficiently protected.

The undertaking extends to damage suffered by any other party notified of the order. The court may require the applicant to give security or to identify the assets it will use in support of any undertaking. The duty of full and frank disclosure (see below) extends to facts which affect the value of the security given.

Depending on the financial position of the applicant, the court may request that the undertaking be fortified. This could involve paying a set sum into court to satisfy the court that the applicant can pay damages if required to do so. In certain circumstances, the court could require a cross-undertaking in damages for an unlimited amount. In certain circumstances the cross-undertaking can be limited to a limited sum, but this is rare and the court will not order this without exceptional evidence.

Assets affected by the freezing order

A freezing order can freeze only those assets over which a judgment can be attached. These can be tangible or intangible assets - for example money held in bank accounts, land, vehicles, shares, bonds or other financial instruments or insurance premiums. Assets can include those held beneficially for another party, for example assets held on trust or assets which the respondent has the power to treat as if they are their own. However, it is usually difficult to obtain a freezing order over a beneficiary's entitlement under a discretionary trust. The court must consider whether the asset which the applicant hopes to restrain satisfies the definition of legal property.

Recent developments have shown that the courts are willing to view digital assets as property, which is one of the first hurdles to being granted a freezing order over these type of assets. For example, the High Court has accepted that crypto assets in the form of cryptocurrency - such as bitcoin - and non-fungible tokens are capable of constituting property, and therefore capable of being the subject of a freezing order.

A freezing order can apply to assets held within England and Wales (a domestic freezing order) or to assets outside England and Wales (a worldwide freezing order). A court also has the ability to grant a worldwide freezing order but limit its effect in certain jurisdictions.

The freezing order may be:

• limited to the value of the claim, usually including costs and interest – this is the most common form of order and is known as a "maximum sum order";
• limited to a specific asset – where the value of the asset is equal to or greater than the value of the claim;
• unlimited, covering all the respondent's assets – this is only made in exceptional circumstances.

The freezing order normally requires the respondent to disclose the value, location and details of all of its assets exceeding a minimum value. This can include details of specific trusts and trust assets.

The freezing order will usually allow the respondent to spend a limited sum on ordinary living expenses or reasonable legal fees. If it is shown that the respondent has access to other funds in excess of the value of the freezing order sought, the court may grant an order without these exceptions.

An interim freezing order will also typically have an exception for expenditure that the respondent incurs during the ordinary course of business.

In the post-judgment context, where an applicant has a favourable judgment, this kind of relief is viewed as an aid to enforcement of that judgment, as liability has at that point been established. Therefore, the applicant could and should apply for more stringent terms to a freezing order, such as removing an exception for the respondent to be permitted ordinary business expenditure. In the context of business expenditure, the court’s starting point is that this type of permitted expenditure will usually be inappropriate, although this will be up to the discretion of the court.

Procedure

An application for a freezing order will be decided on by a judge at a court hearing.

A freezing order application will often be made 'without notice' to the other party, that is, without the other party being present at or aware of the hearing. This prevents the respondent becoming aware that their assets might be frozen and dealing with the assets before a freezing order can be granted. The applicant should consider in each case whether the risks or urgency merit a 'without notice' application, or whether notice of the application should be given to the respondent.

The application for the freezing order must be supported by evidence in the form of an affidavit sworn by the person or organisation seeking the order. The affidavit must address all the conditions for obtaining a freezing order. The affidavit must be accurate and provide all relevant documentation and information.

The affidavit must also explain the reasons for the urgency of the application and the risk that the assets will be dissipated. It must also give evidence of that organisation's ability to meet the cross-undertaking in damages.

Initially a freezing order sought 'without notice' will be granted on an interim basis, and it will last until the "return date". The return date is a date set for a further hearing at which the respondent will be present and the parties present their arguments as to why the order should be continued, varied or set aside.

Duty of full and frank disclosure: applications 'without notice'

In a 'without notice' application, as the respondent is not present at the first hearing, the applicant must disclose all relevant material to the court including material which may be unfavourable to it. This includes matters raised by the other party in correspondence and any relevant defences. The duty of full and frank disclosure is ongoing. Any incorrect information or omission which is subsequently discovered must be corrected, even subsequent to the granting of freezing order.

Failing to comply with the obligation of full and frank disclosure may result in the court setting aside the freezing order. Even if the lack of disclosure does not change the court's decision to grant a freezing order, the applicant may be ordered to pay compensation for any loss suffered by the other party due to the lack of disclosure. Applicants must be aware that knowingly misleading the court could lead to a criminal charge of perjury.

Serving a freezing order

The order must be served promptly after the hearing, and served personally on the respondent to make sure that it is acknowledged and can be enforced. The respondent should also be served with the application, supporting evidence and a note of any 'without notice' hearing.

In some cases where the order includes assets held by third parties, the order may be served on a third party before it is served on the respondent. This may happen where, for example, a bank holds funds on behalf of the respondent, so that the funds can be frozen before any attempt is made to transfer them out of the bank account.

The mandatory aspects of the freezing order, including liability undertakings and the asset disclosure obligation, take effect only when the order is served personally. However the prohibitory aspects of the order, including the obligation not to dispose of assets, take effect following service by any means.

Breaching a freezing order

Freezing orders must contain a penal notice. If the respondent is validly served with the freezing order, they can be held in contempt of court if they breach its terms. This could result in the respondent being imprisoned, fined or having their assets seized.  A knowing and deliberate failure to comply with the terms of a freezing order, including any ancillary orders, will be ruled by an English court as serious contempt.

Tactical advantages of freezing orders

Freezing orders:

• preserve assets for enforcement purposes;
• assist in asset tracing claims by forcing the respondent to disclose the details of its assets;
• are a tactically powerful weapon due to the penal order, which may lead to faster settlement of an underlying claim;
• the process may lead to a resolution of the underlying dispute without the need for a trial, saving time and costs; and
• they can be utilised in the fast-moving worlds of crypto and cyber fraud.

Limitations of freezing orders

Limitations of freezing orders include:

• they are draconian orders which the court will not grant lightly;
• the process can be expensive and the duty of full and frank disclosure can be burdensome on the applicant;
• the applicant will have to give undertakings to the court to pay costs incurred in complying with the order and any damages if it is later shown that the order should not have been granted. These undertakings could impose a large liability on the applicant;
• a freezing order does not provide the applicant with any security over assets or priority over those assets ahead of other creditors; and
• unless and until the freezing order is registered or recognised by a foreign court, it will not be enforceable overseas. Prompt registration in the local courts is therefore important.