Why not be less shy in the use of Worldwide Freezing Injunctions?

Freezing injunctions can be of huge tactical benefit in banking and private equity disputes and in preventing fraudulent parties from disposing assets

What are freezing injunctions and are they enforceable?

A freezing injunction, known in common law jurisdictions as the mareva injunction¹, is a type of interim relief which prohibits a party from disposing of or dissipating its assets until judgment is pronounced in the main proceeding.

Some jurisdictions are generous with granting it and extending its scope far outside their borders². For example, courts in England, Singapore and the DIFC in Dubai willingly and generously grant worldwide freezing injunctions. Courts in other common law jurisdictions, are more conservative in their approach. For example, an Indian court might be willing to grant a freezer over assets only within the Indian jurisdiction.

Indian clients often do not consider this crucial tactic and if they do, they ask hesitatingly, their greatest concern being enforcement. For example, if an Indian client sought a freezing injunction in London, how would they enforce it in India? The answer is simple. Firstly, India has signed bilateral treaties for enforcement of foreign court judgments with about nine countries including the UK and UAE and therefore judgments from these nine countries are enforceable in India provided that the judgment falls within section 13 of the CPC 1908. (Effectively, this opens up enforcement to many more countries because, lets say there was a judgment passed in Ghana. Once the Ghanain judgment is recognized in the UK, it would be enforceable in India as a judgment of an English court).

Secondly, the moment a freezing injunction of any court of law is served on a bank, or the holder of an asset such as a depository of shares e.g. NSDL/CDSL, or served on a co-operative housing society etc., these entities would respect the order of the court, even if it were not an Indian court. And this is the greatest strength of a worldwide freezing injunction – it is enforced without local courts pronouncing an order upholding the foreign freezer.

When should one seek a freezing injunction?

Freezing injunctions can be widely used in banking disputes. There are usually sought at the beginning of the dissipation, for example, if an Indian company has borrowed from Indian lenders as well as from foreign lenders, and has pledged its Indian assets to Indian lenders and foreign assets to foreign lenders, if it sells one of its foreign assets desirous of transferring the sale proceeds to itself or its Indian lenders, then foreign banks can bring a freezing injunction to prevent the sale proceeds from being transferred to India.

It can unusually be used at the end of a matter. For example, in Mr Vijay Mallya's case, Indian banks sought a worldwide freezing injunction after they were successful at the DRT in India.

In cases of international cyber theft, English courts have adopted a modern approach by granting Norwich Pharmacal (disclosure) orders against persons unknown that would require banks to reveal the identity of the fraudster. Once the identity is known, worldwide freezing injunctions are frequently granted against the fraudulent person's assets.

In the case of shareholder disputes, freezing injunctions can be a valuable tool in a dispute strategy toolbox, not least because freezing injunctions are accompanied by a penal notice so that if a respondent fails to comply, it could be in contempt of court, face a fine and/or imprisonment or seizure of assets. Let's say two parties have signed a shareholders agreement containing a right of first refusal i.e. if either shareholder sells its shareholding, the clause requires it to first offer the shares to the other shareholder before selling them on the open market. If one party breaches the right of first refusal clause and attempts to sell its shares to a third party, then the other shareholder can effectively prevent this by applying for a freezing injunction. This would be particularly effective if the shares were held in a publicly listed company since the freezer, if served on the depository, would prompt the depository to refuse the transfer, taking matters outside the purview of the truant shareholder and the third party.

What is the legal test?

In English law, the grant of a freezing injunction is a discretionary remedy. This implies the usual equitable bars apply such as the applicant must come to court with clean hands and is under a duty to make full and frank disclosure of all points, for an against, at the ex parte hearing. The application must also be brought without delay. If an English court has jurisdiction to grant a freezing injunction (more on this below), then it would apply the test in Lakatamia Shipping Company Limited v Toshiko Morimoto [2019] EWCA Civ 2203 at paragraph 33 "… the applicant for the order has a good, arguable case, that there is a real risk that judgment would go unsatisfied by reason of disposal by the defendant of his assets, unless he is restrained by the court from disposing of them, and that it would be just and convenient in all circumstances to grant the freezing order." This succinct summary is also a good reminder that the purpose of a freezing injunction is to protect the applicant against a dissipation of assets.

The court will also wish to be satisfied on assets, if any, to satisfy the judgment, the rights of (and any impact upon) any third parties who may be affected by the freezer, and whether such an order would cause legitimate and disproportionate hardship for the respondent.

English Courts have declined the grant of freezing injunctions on grounds of insufficient connection to English jurisdiction, see Petrochemical Logistics Ltd & Axel Krueger v PSB Alpha AG & Konstantinos Ghertsos [2020] EWHC 975 (Comm). Here the court declined to continue two freezing injunctions against the defendants in support of a London-seated arbitration and a Swiss-seated arbitration. In doing so, the court noted the test set by Walker J in Mobil Cerro Negro³ which provided that the English court "will only be prepared to exercise discretion to grant an application in aid of foreign litigation for a freezing order affecting assets not located here if the respondent or the dispute has a sufficiently strong link here" or where "there is some other factor of sufficient strength to justify proceedings in the absence of such link".

At the DIFC Courts in Dubai, similar common law principles are followed. In Ithmar Capital Ltd v 8 Investment FZE [2008] CA 001 at paragraph 25, the DIFC Court of Appeal held that the applicant must satisfy the Court that (i) it has a good arguable case (ii) the defendant has assets to satisfy the judgment (iii) there is a real risk that the judgment will not be satisfied due to an unjustifiable disposal of those assets, and (iv) it is just and convenient to make the order sought.

More recently, the judgment in Childescu v Gheorghiu [2019] DIFC CFI 074 pronounced on 4 February, 2020 the DIFC court granted ancillary freezing orders in support of a proceeding in Cyprus.

In Singapore, the Court of Appeal in JTrust Asia Pte Ltd v Group Lease Holdings Pte Ltd & others (2020) SGCA 54 held that in order to successfully obtain a freezing injunction, the applicant must prove a good arguable case and that there was a real risk that the defendant would dissipate assets if a freezer was not granted. A good arguable case is one which is more than barely capable of serious argument, but not necessarily a greater than 50% chance of success (see Yves Charles Edgar v Accent Delight International Ltd [2015] 5 SLR 558 at [36]).

Conclusion

Freezing injunctions can be of huge tactical benefit in banking and private equity disputes. They also play an important role in preventing fraudulent parties from disposing assets. If granted, the rights of the party whose assets are frozen are balanced by requiring the applicant to furnish an undertaking that requires the respondent to be compensated for losses if the freezing injunction is lifted either on the return date or following trial.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.