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Improperly obtained freezing order can prove costly, says expert

A company that obtained a freezing injunction which prevented a businessman from investing his assets has been told it will have to pay "tens of millions of dollars" in damages by the High Court in London.31 Aug 2016

Fiona Trust, a subsidiary within shipping company Sovcomflot, obtained a freezing order in 2005 against businessman Yuri Nikitin, who was forced to pay $208.5 million into a designated account. A further order in 2007 froze another $278 million. In December 2010, Fiona Trust won damages worth $16 million plus interest.

Mr Justice Males said that the freezing order had therefore resulted in assets worth "far in excess of the sums for which Mr Nikitin and his companies were ultimately held liable" being frozen and awarded damages to Nikitin to make up for his lost investment potential. The judge said those seeking the freezing order against Nikitin had "committed serious and culpable breaches of their duty of full and frank disclosure, both in 2005 and in 2007".

"A freezing order improperly obtained which ties up several hundred million dollars for five years is likely, at least in normal circumstances, to cause significant losses to a defendant whose assets are frozen in this way, especially if the defendant is a businessman with undoubted entrepreneurial flair and a successful track record," Mr Justice Males said. "The fact that he has been found to be dishonest in at least some of his business dealings and untruthful in his evidence in this court means that his evidence of losses suffered may command little or no weight, but need not affect the likelihood that some such losses will have been caused."

Asset recovery expert Alan Sheeley of Pinsent Masons, the law firm behind Out-Law.com, said the ruling serves "a very strong warning" to those seeking to obtain a freezing order against another party.

"This is not an area where lawyers should dabble," Sheeley said. "Lawyers and clients should really consider whether a freezing order is appropriate and examine the upside, and downside. I advise regularly on freezing orders, disclosure orders and search and seize orders and am well versed on the tests and the latest law as well. Such knowledge is vital when using the 'nuclear weapons' of the civil courts to protect victims’ assets. Victims and lawyers should not rush off to court to obtain such orders without thinking very carefully as to the strategy being adopted. This case is a very good example, and warning, to lawyers and victims to make sure they know all the facts before pushing the launch button on the nuclear weapons."

Lawyers should examine their clients and test their clients’ knowledge and facts and not blindly follow their instructions, Sheeley said.

"Lawyers acting for respondents to a freezing order should advise their clients on the chances of seeking damages from the applicant and keep the applicant fully informed of the likely business opportunities that are being lost if a payment into court is necessary," Sheeley said. "Such business opportunities should be well evidenced and not be just theoretical if the respondent wants to maximise its chances of obtaining damages."