A freezing injunction is a court order which prevents a party from disposing of or dealing with its assets.
When will an application for a freezing injunction be made?
Usually an application for a freezing injunction is made before proceedings – including arbitration proceedings – are issued, when the applicant fears that the other party will dispose of its assets before judgment can be obtained and enforced. However, a freezing injunction can be sought at any time – before proceedings are issued, during the course of proceedings and after judgment has been obtained (to prevent the disposal of assets before the judgment is enforced).
A freezing injunction takes effect personally against the party subject to it, and can therefore be granted in respect of any known assets held up to the value of the claim. Equally, the injunction can be granted in respect of particular assets which are the subject matter of a claim - this is particularly useful in cases where fraud is suspected.
Freezing injunctions can be granted by the court in respect of overseas proceedings in special circumstances.
A freezing injunction may be made against a third party who holds assets on behalf of a party - for example, a bank - as well as against that party itself.
When will the court grant a freezing injunction?
The court has the discretion to grant a freezing injunction, 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 must have a cause of action – that is, an underlying legal or equitable right which may give rise to a judgment that can be enforced against the respondent's assets. In this respect, a counterclaim will be sufficient;
- the applicant must demonstrate to the court that it has a good arguable case – although it does not need to show that the case will definitely succeed;
- there must be sufficient assets in existence to meet the claim;
- there must be a real risk of the disposal or use of the assets;
- the applicant must provide an undertaking to the court to pay any damages to the other party if it is later shown that the injunction should not have been granted (see below).
When making its decision the court will also apply the 'balance of convenience' test, which means that the court will take all relevant factors into account and will weigh the damage caused to the subject of the injunction against the benefit it would provide to the applicant. The applicant's behaviour will also be considered and it must act reasonably, diligently and without unnecessary delay. Any delay in applying for a freezing injunction will make it more difficult to convince the court that the injunction is necessary. Delay also increases the risk that the assets in question will already have been dissipated by the time any injunction is granted.
Cross-undertaking in damages
The applicant must undertake to the court that it will pay any damages that the other party suffers under the freezing injunction if it later turns out that the injunction should not have been granted. This undertaking extends to damage suffered by any other party notified of the injunction. 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.
Assets affected by the freezing injunction
A freezing injunction can freeze only those assets over which a judgment can be attached. As well as money held in bank accounts, an injunction can apply to land, vehicles, shares, bonds and other financial instruments. Assets can include those held beneficially for another party, for example assets held on trust.
A freezing injunction can apply to assets held within England and Wales (a domestic freezing injunction) or to assets outside England and Wales (a worldwide freezing injunction).
The freezing injunction may be:
- limited to the value of the claim – a 'maximum sum order'. This is the most common type;
- limited to a specific asset which has a value that 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 injunction normally requires the subject of it to disclose the value, location and details of all its assets exceeding a minimum value. It does not prevent the subject of the injunction from spending money on ordinary living expenses, legal fees, carrying out ordinary business transactions or paying debts as they fall due. If it is shown that the subject of the injunction has access to other funds in excess of the value of the freezing order sought, the court may grant an order without these exceptions.
A freezing injunction will often be made 'without notice' to the other party - that is, without the other party being present at or aware of the hearing, because to give notice might lead to assets being dissipated. The applicant should consider in each case whether the risks or urgency merit a 'without notice' application.
The application for the freezing injunction must be supported by evidence in the form of an affidavit sworn by the person or organisation seeking the order. It must be accurate and give full and frank disclosure, discussed below. The affidavit must 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 any cross-undertaking in damages.
Initially a freezing injunction sought 'without notice' will be granted on an interim basis, and it will last until the date set for a further hearing at which the other party will be present. At that hearing there will be arguments from both sides as to why the injunction should be continued, varied or set aside.
Duty of full and frank disclosure: applications without notice
As the other party is not present at the first hearing, the person seeking the order must disclose all relevant material to the court including material which may be unfavourable to them. This includes matters raised by the other party in correspondence and any relevant defences. The duty of full and frank disclosure extends to all known material facts, including any which would have been apparent on proper enquiry. The duty of full and frank disclosure is ongoing and any incorrect information or omission which is subsequently discovered must be corrected immediately.
Failing to comply with this disclosure obligation may result in the court setting aside the injunction and ordering the person who sought it to indemnify the other party for any costs incurred and to pay compensation for any loss suffered by the other party because of the injunction. This may occur even if the omission would not have changed the court's decision on whether to grant the injunction in the first place. Knowingly misleading the court could lead to a criminal charge of perjury.
Serving a freezing injunction
The injunction must be served promptly after the hearing, and served personally on its subject to make sure that it can be enforced. It must also begin with a 'penal notice' warning of the consequences of breach. The subject of the injunction should also be served with the application, supporting evidence and a note of any 'without notice' hearing.
In some cases where the injunction includes assets held by third parties, the order may be served on a third party before it is served on its subject. This may happen where, for example, a bank holds funds on behalf of the subject of the injunction - so that 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 injunction
Breaching the terms of a freezing injunction opens a person or organisation up to proceedings for contempt of court. This is punishable by a fine, imprisonment or the seizure of the assets subject to the injunction. The person applying for the injunction has no right to damages against the other party arising from the breach of a freezing injunction.
Limitations of freezing injunctions
- they are draconian orders which the court will not grant lightly;
- the process is expensive and time-consuming;
- the applicant has a duty of full and frank disclosure, which can be burdensome;
- the applicant will have to give a number of undertakings to the court including:
- an undertaking to pay damages to the other party if it is later shown that the injunction should not have been granted – these damages can be significant if the other party has, for example, not been able to use assets in the course of its business;
- an undertaking to pay costs reasonably incurred by a third party in complying with the injunction - for example, the costs sustained by a bank in freezing an account;
- the person seeking the injunction risks being in contempt of court should it breach the undertaking given to the court.
- a freezing injunction does not provide the applicant with any security over assets or priority over those assets ahead of other creditors;
- once the injunction has been granted, the applicant must pursue its underlying claim with all the normal costs and risks of litigation;
- unless and until the freezing injunction is registered or recognised by a foreign court, it will not be enforceable overseas and therefore not legally binding on third parties outside of the jurisdiction where it is granted. Although an overseas bank may elect to observe an injunction obtained in the UK as a matter of policy, this is not guaranteed. Prompt registration in the local courts is therefore important;
- there is a risk that the injunction will have little benefit if, once it is granted, the person who sought it discovers that the assets which it covers have already been dissipated.
Tactical advantages of freezing injunctions:
- they preserve assets for enforcement purposes;
- they assist in asset tracing claims, for example by forcing the party subject to the injunction to disclose the details of its assets;
- they inconvenience and affect the creditworthiness of the party subject to the injunction. This might bring financial pressure to settle, pay up or offer up security - making a freezing injunction a tactically powerful weapon; and
- the injunction process may lead to a resolution of the underlying dispute without the need for a trial.