Court confirms third party security rights are not affected by freezing order

However, charge holders should proceed with caution before enforcing their rights, since "getting such a realisation wrong might inadvertently breach the freezing order", according to litigation expert Michael Reading of Pinsent Masons, the law firm behind Out-Law.com.

"Such a breach can lead to unpleasant consequences for the charge holder, including the potential for committal proceedings for contempt of court," he said. "We would therefore always recommend a charge holder to take legal advice if it is on notice of a freezing order before it takes any steps which might put itself at risk."

"Properly advised, a charge holder can usually avoid risk and get what they want. This can often be achieved without involving the court. However, when the worst case scenario involves a breach of a penal notice, sometimes a planned trip to the court requesting permission to do something is the only way to be certain to avoid an unexpected trip to court asking for relief from a sanction for contempt of court," he said.

Mr Justice Mann's ruling was the latest in a dispute involving yacht manufacturer Van Dutch Marine, its holding company and their two sole directors and the company's failure to repay a loan. TCA Global Partnership, a Cayman-based hedge fund, which held an unrelated charge over some of Van Dutch's assets, applied to the court for permission to have its rights reflected in a freezing order granted in favour of lender Kevin Taylor. Taylor, who is owed millions of dollars by the defendants in the case, opposed the application.

The judge said that although the application "might be thought to be unnecessary, or at least no more than a precaution" given the nature and purpose of a freezing order. However, the case was complicated somewhat by comments made by another High Court judge in 2001. These comments seemed to imply that "the bank was under some sort of duty to apply for permission to exercise its security, in default of which it would be in contempt of court", Mr Justice Mann said.

"Despite the respect which has to be given to the views of such an experienced commercial court judge, I respectfully disagree with that analysis," the judge said.

"In all the circumstances I prefer the principled approach which determines that, in a normal security enforcement situation which does not involve anything which could properly be classed as a disposal by the defendant, which is not collusive (in an infringement of the order) and which does not amount to aiding and abetting a breach of the order, a secured creditor does not need a variation of a freezing order. That approach also happens to lead to a sensible practical result," he said.

The judge acknowledged that, "in some complex cases, the anxiety of a secured creditor to tread warily in an apparently hostile litigation environment would lead to a safety-first approach of seeking a variation". However, he did not consider that this course of action would be "generally necessary in what I will call a standard case, of which this is one".

The case was further complicated by the fact that there was a dispute over the true ownership of the assets in question. However, the judge ruled that this was a separate issue. If it turned out that the assets that TCA was seeking to enforce over did not belong to Van Dutch, TCA should bear the risk of the consequences of that, he said.

"It is no purpose of the freezing order to protect [Van Dutch] from that," he said.

Litigation expert Michael Reading said that although the case did not provide new law, it "helpfully clarifies the position of a third party who holds a charge over assets held under a freezing order".

"The judge confirmed that applying to the court for a variation of the freezing order so that the security might be realised is not usually necessary as the freezing order does not impinge on the rights of a third party chargor. This is a helpful clarification as it confirms that a charger who is a third party to any freezing order can usually enforce a charge on a frozen asset as and when they so choose," he said.