FREEZING ORDERS AND THE DUTIES OWED ON EX PARTE APPLICATIONS: NUCLEAR WEAPONS THAT CAN BLOW UP IN YOUR FACE
COOKE -v- VENULUM PROPERTY INVESTMENTS LTD [2013] EWHC 4288
Freezing orders are part of the “nuclear weapons” of civil litigation. As such they should be approached with extreme care. This case illustrates the dangers involved when a party seeks a freezing order without notice without a detailed knowledge of the law involved and in circumstances where there is an argument that full disclosure has not been given
THE CASE
This case proceeded in the county court and concerned a disputed right of way; the county court claim was for an injunction and damages for harassment, limited to £15,000.
THE ORIGINAL FREEZING ORDER
The claimants were concerned that title in the property had been transferred. They made an application in the High Court to join a company with a similar name into the action and obtained an ex parte order freezing the assets. This application was made after the trial but before the judge in the county court gave judgment.
The freezing order was effective until the 8th November 2013. The matter was then returned to the High Court on the 14th November and came before Mr Justice Morgan.
DEFECTS WITH THE FREEZING ORDER
The original freezing order did not have any of the usual provisions of a freezing order:
- That the respondent could deal with or dispose assets in the ordinary and proper course of business.
- There was no provision allowing the respondent to make use of its assets to pay for the defence of the claim against it.
THE CLAIMANTS’ ARGUMENTS WHEN THE INJUNCTION APPLICATION WAS HEARD INTER PARTES
The claimants argued that the court had power to continue to the freezing order, albeit in a reduced amount.
THE DEFENDANTS’ ARGUMENTS
The third defendant (the party subject to the freezing order) argued that
- The court did not have jurisdiction to grant freezing relief. The claimant did not have an existing cause of action for a sum of money against the third defendant.
- The best that the claimants could say was that they have or they might have a prospect of an order in their favour as regards their costs of the county court proceedings.
- It was not appropriate to have made the application on an ex parte basis and that the arguments that the defendant had in opposition of the application were not drawn to the attention of Judge Barker as they ought to have been.
- There was no sufficient evidence of risk of dissipation and that it was not just and convenient to grant a freezing order in this case.
THE JUDGE’S CONCLUSIONS
The judge refused to extend the freezing order. He also gave the third defendant liberty to apply to enforce the undertakings in damages which the claimants gave as the price of obtaining the freezing order in the first place and ordered the claimants to pay the third defendant’s costs of the High Court proceedings on an indemnity basis.
THE JUDGE’S REASONING: THE COURT COULD NOT MAKE AN ORDER IN THESE CIRCUMSTANCES
The first consideration was whether the Court had jurisdiction to make a freezing order :
“12. Firstly, I accept Mr Stoner’s submission that the court never had, and today does not have, jurisdiction to make a freezing order to effectively secure or attempt to secure for the claimants the rights which they may in due course – but equally may not – acquire pursuant to an order for costs. The law on freezing injunctions generally is really quite clear. It is spelt out, for example, in chapter 12 of Gee on Commercial Injunctions (5th Edition) and Mr Stoner has drawn my attention to another textbook, McGrath on Commercial Fraud in Civil Practice, where the authorities are referred to, which make the point that there must be an existing cause of action for the relief which is to be protected by the grant of a freezing order. A number of cases have established that. Two in particular were drawn to my attention. They were The Steamship Mutual Underwriting Association (Bermuda) Limited v Thakur Shipping Company Limited [1986] 2 Lloyd’s Rep 439 and Veracruz Transportation Inc. v VC Shipping Company Inc. [1992] 1 Lloyd’s Rep 353.
13. Of course, the position is different when an order for costs has been made. If a litigant obtains an order in its favour and even before the amount payable is determined it can be said that it is in the order of x then the court can protect the litigant’s rights under that order by granting a freezing injunction, provided always that the other criteria for freezing injunctions are made out. An example of that is the decision of the Court of Appeal in Jet West Limited v Haddican [1992] 1 WLR 487.
14. In the present case, the claimants do not have a relevant order for costs in their favour. They refer to the possibility that an order might be made in their favour. That seems to me to fall wholly within the rule which I have referred to, that freezing relief is not to be granted in relation to a claim which does not currently exist but might later come into existence. The only reason to pause in relation to that ruling is that, as Gee on Commercial Injunctions points out, in particular at paragraph 12004, when the court has jurisdiction to grant freezing relief and when it decides to do so to protect the amount of the money claim, the court is not restricted to the amount of the money claim itself but can add in a figure for interest and a figure for costs. Gee refers to authorities where that has been done. Notably, perhaps, that appears from a short but nonetheless helpful comment of Lord Donaldson MR in Atlas Maritime Company SA v Avalon Maritime Limited (No. 3) [1991] 1 WLR 917 & 920 D-E.
15. I can see some scope for argument as to whether it is appropriate to add in a figure for costs, but it does appear to be the practice of the court, and, sitting at first instance, I would be content to follow that practice until a higher court indicated that it was no longer appropriate. Of course, when one does add in a figure for costs in that way, it is normally at a time before the costs are incurred. One cannot predict what form the litigation will take and how long it will be and what the costs will end up being so one usually takes a relatively modest prediction as to future costs when one exercises that power as I have described it. Whether that practice is well-founded or not well-founded, it seems to me that it cannot extend to a case like the present where there is no claim to monetary relief where freezing protection is sought as a support or protection. The only thing being sought here is security for the costs of litigation, where there has not been an order for costs and where the claimants cannot show that they have any present or past entitlement to those costs.
16. Mr Stoner very fairly drew my attention to one decision referred to in Gee where the point is considered in a little more detail than perhaps in other cases. It is the decision of Fenn Kar Bak Lily v Lay & Tung [1994] HKCFI 241, a decision of Mr Justice Woo in the Hong Kong Court of First Instance. That was a case in which the claimant was suing for a relatively small sum of damages and it was said that the claimant had incurred a very substantial bill for costs in the litigation up to that date and so the claimant wished to have a freezing order to protect the monetary claim and to protect the possibility that, in due course, the claimant might obtain an order for costs in its favour. The learned judge referred to the jurisdiction in Hong Kong, which is essentially in the same terms as section 37 of the Senior Courts Act 1981. The learned judge directed himself that the sole criterion was whether it was just and convenient to grant the relief sought. The judge noted that there was a danger that one might be doing, by way of a freezing jurisdiction, something that was more properly to be addressed as to security for costs where different criteria might apply and where it might or might not be appropriate to order security for costs.
17. I do not in the end find that a helpful authority and I do not certainly find it an authority that persuades me that I do have jurisdiction to make the order that is sought in this case. First of all, the judge in that case did not address the question of jurisdiction where the claim was for a freezing order by way of security for costs. The judge only had to deal with the case of the kind considered in Gee on Commercial Injunctions where the court had undoubted jurisdiction to grant freezing relief in relation to the monetary claim and the question was how it should approach the amount of costs to be added if they were to be added to the amount frozen.
18. Having regard to the legal principles I have attempted to identify, it follows inevitably that the court does not have jurisdiction to make this order. Judge Barker did not have jurisdiction in the first instance to do it and I therefore will not continue his order hereafter. As I have indicated, since the only substantive relief sought in these proceedings is freezing relief, the right course, it seems to me, is to dismiss the action. I do wish, however, to refer to some other features of the applications that have been made because they have a bearing on the question of the costs order I should make.
WAS IT REASONABLE TO MAKE THE APPLICATION EX PARTE?
The Judge also considered that the claimants had approached their original application in the wrong way
“19. I consider that it was inappropriate for the claimants to have made their original application ex parte. Courts have said time and time again that there is something inherently unjust in hearing one party without the other party. Of course, sometimes a court is forced to act in that way and run the grave risk of an injustice being done, but the court should not be asked to do that save where it is fully justified. Mr Blackett-Ord says that it is common place with applications for freezing orders to go ex parte and indeed that is right, although it may happen more often than it should, but, looking at this case, I do not see there was any grave risk of disadvantage to the claimants by informing the defendants, including the intended third defendant, of the intended application. What is the worst that could have happened? The worst that could have happened is that the third defendant would transfer the property again and so the court would be faced at an inter partes hearing with another party, say a fourth defendant, owning the title rather than the third defendant. There was no particular magic in the third defendant owning the property. The claimant would have preferred the first defendant to have retained it so that the third defendant being substituted by the fourth defendant would hardly have been a disadvantage to the claimants. If the third defendant had been given an opportunity to appear before Judge Barker with the benefit of legal advice, it may very well be that this order would never have been made in the first place.”
HAD THE CLAIMANTS’ DRAWN THE DEFENDANTS’ ARGUMENTS TO THE JUDGE BARKER?
Mr Justice Morgan found that the claimants had not addressed the defendant’s possible arguments
“20. Secondly, I am also critical of the fact that Judge Barker was not told that there was a possible argument as to jurisdiction. I am prepared to assume that the claimants just did not think about it and so they are not personally at fault. However, that does not remove the sting of the criticism because it seems to me that it was obvious that they should have thought about it. They were essentially making an application for security for costs in circumstances where they did not address the criteria for security for costs and were seeking to turn an application for security for costs, wholly impermissibly and, in my experience, in a wholly novel way, into an application for a freezing order, so the matter ought to have been drawn to the attention of the judge by competent legal advisors.
21. I am also concerned that the risk of dissipation was not properly addressed by the claimants and, further, the order which they produced for Judge Barker’s consideration had quite wrongly removed from it appropriate safeguards and, contrary to the settled practice, the deletions from the standard form of order were not drawn to the attention of Judge Barker. The fact is that the claimants then did not read the order they had obtained, did not realise that there was a return date of 8th November, did not serve an application notice for 8th November, did not arrange for the court to deal with the matter on 8th November and then, when they had that matter pointed out to them, went behind the back of the third defendant and made another ex parte application to get the order extended at a time when they knew that the continuation of the order was something which was opposed by the third defendant.
THE CLAIMANTS’ UNDERTAKING TO SERVE THE ORDER AND SUPPORTING MATERIAL
He also concluded that the claimants’ solicitors had not complied with their duty to serve the order and supporting material, even though they had warned the third defendant that an order had been obtained. This warranted an order against them for indemnity costs:
“22.My attention has also been drawn to the fact that the claimants’ solicitors did not comply with the undertaking they gave to serve the order and the supporting material they had shown to Judge Barker. Some of the sting of that criticism is blunted by the fact that there was a communication of the fact that an order had been obtained, and that communication was relatively prompt. That did not relieve the claimants’ solicitors of the burden of complying with the undertaking to serve as they should have served. They should not have taken the view that they could unilaterally decide to postpone service to allow them to register the order at the land registry. I think, in view of those various criticisms, this case is outside the norm and it is appropriate, therefore, to order the claimants to pay the costs of the High Court proceedings on the indemnity basis.”
SUMMARY
The lesson is clear. Know the requirements for obtaining a freezing order and ensure they are made out before making an application. Remember that you will have to provide an undertaking to the court to pay any damages to a respondent if it is later shown that the freezing order should not have been granted.
- The court must have jurisdiction.
- The applicant must have a cause of action against the party against whom the injunction is sought.
- The applicant must be able to demonstrate that they have a good arguable case.
- There must be a real risk of the disposal or dissipation of the assets.
- If you make an application without notice you must disclose all material relevant matters to the court. This includes arguments which might be raised by the respondents and any relevant defences.
USEFUL SOURCES FOR INFORMATION ON INJUNCTIONS
James Bickford Smith of Littleton Chambers on Freezing Orders and Best Practice
David Partington of Sovereign Chambers on Important judgment on freezing orders and without notice applications
Family Law week on freezing orders in financial remedy cases
Guildhall Chambers Urgent Injunction Applications: Best Practice and Pitfalls to Avoid
The whole basis of the courts being permitted to grant a freezing order ex-parte simply in order to “protect” a claimant’s perceived success at trial needs to to be looked at. It could be said that freezing orders are being handed like confetti by the High Court in far too many instances.
Far from being the nuclear weapon of civil litigation it has become the “boots on the ground” norm and part of the usual arsenal of attack. The courts should not have the power grant freezers simply in order to support claims which have not even been tried.