Freezing orders are most commonly made where there is evidence that a plaintiff has been the victim of a fraud masterminded by a defendant. They are not, however, limited to this situation. Freezing orders may be obtained where there is no allegation of fraud but there is nevertheless a real risk that, if the order is not granted, any judgment obtained by the plaintiff will go unsatisfied.
In certain circumstances, therefore, it may be appropriate to seek a freezing order in conjunction
with a debt claim.
In what circumstances is there a real risk that judgment may not be satisfied?
Each case will depend on its own facts. The most straightforward case is one where the defendant has transferred assets to a related party for no consideration, nominal consideration or at a discounted value. However, other circumstances are also likely to be relevant in an application for a freezing order.
For personal defendants the circumstances include:
- a poor credit record or history of defaulting on debts;
- the only known asset, such as a house, has been put up for sale;
- there are plans to move overseas;
- where their house is not registered in their own name;
- the domicile or residence is overseas;
- they have ignored correspondence in relation to the claim or are unwilling to participate in the litigation;
- prior convictions or a history of the use of an alias;
- they have had experience or are capable of moving large sums of money internationally.
For corporate defendants the circumstances include:
- where there is a plan to transfer large sums to an overseas subsidiary or to pay out large sums by way of dividend;
- they are a foreign company;
- when related companies have defaulted in the payment of judgments or have gone into liquidation owing large sums to creditors.
In order to establish a real risk, there is no need for the plaintiff to show that the defendant has acted dishonestly or intends to act dishonestly. For instance, the fact that a personal defendant is moving abroad or that a corporate defendant is transferring funds to an overseas subsidiary may be entirely unrelated to the plaintiff’s claim. Nevertheless, it may still present a real risk that judgment may go unsatisfied.
Whose assets may be frozen?
Freezing orders apply to all of the defendant’s assets up to the relevant limit whether or not they are held in their own name and whether they are solely or jointly owned. Assets held by third parties may be included in the order where there is good reason to suppose that they are, in truth, the assets of the defendant. This may apply in the following situations:
- where the third party acts in accordance with the defendant’s direct or indirect instructions in dealing with an asset (e.g. bank accounts held in the name of a defendant’s spouse where there is evidence that the defendant is using the accounts for their own purposes. It could also involve assets of a company or a trust where there is evidence that that entity is the defendant’s alter ego);
- where the transfer of an asset by the defendant to the third party is liable to be set aside if a trustee in bankruptcy or liquidator were appointed to the defendant (e.g. transactions at an undervalue or preferential payments of debts);
- where the third party is a debtor of the defendant or has some form of liability to them which is, or will be, enforceable and there is a real risk that the third party will collude with the defendant to dissipate the asset if the order is not made (e.g. the defendant has a right of indemnity against the third party).
Points to bear in mind
A freezing order is a powerful tool and can provide the plaintiff with an enormous initial advantage in any litigation. In order to counter-balance such a situation, the plaintiff is required to provide an undertaking in damages whenever a freezing order is granted. If the order is later found to have been wrongly granted because the underlying claim is unsuccessful or there has been material non-disclosure by the plaintiff on a without notice application for the order, then the plaintiff will be liable for any loss caused to the defendant and any third parties due to the grant of the order. It is also important to note that a freezing order does not prevent other legitimate creditors of the defendant from executing their own judgments against the defendant’s assets. This does not apply if the defendant is about to become insolvent, in which case the frozen assets should be preserved for the benefit of creditors generally, or when the creditor is a related party.
In a debt claim, it is usually fairly easy for the plaintiff to satisfy the court that there is a good, arguable case against the defendant and often the claim is very likely to succeed. If there is solid evidence that there is a real risk that judgment will go unsatisfied if the order is not made, a freezing order is invaluable in preventing the unjustified dissipation of assets while the claim is being pursued.