UK: Freezing Injunctions in Fraud Cases - Recent Cases

Last Updated: 20 December 2002

A freezing injunction (formerly known as a "Mareva" injunction) restrains a party from dealing with its assets. They are frequently used in fraud cases to safeguard the proceeds of the fraud until trial.

The English Courts’ powers to grant freezing injunctions are more extensive than in most other jurisdictions and they are seen by some to allow a fundamentally draconian procedure. However, an increasingly flexible interpretation of the modern and global application of freezing injunctions is evident in the following Court of Appeal decisions.

  • In Bank of China v IBM LLC and others [2001] EWCA 1933, it was recommended that the so-called ‘Baltic proviso’ be adopted into the standard form of the worldwide freezing injunction to enable third parties to the freezing order, such as banks or similar institutions with overseas branches, to comply with what they reasonably believe to be their obligations under the laws of the country where the assets are located.
  • In Halifax Plc v Rupert Sydney Chandler [2001] EWCA Civ 1750, it was held that the standard provision set out in freezing injunctions which allows the exemption of a sum specified by the court at the time of the freezing injunction, representing the reasonable legal expenses of the person the subject of the freezing order, ought to include such expenses relating to other actions with a real prospect of success on foot at the time of the order.

Incorporating the ‘Baltic proviso’

In the Bank of China case, the Bank of China obtained a worldwide freezing injunction in aid of proceedings in the USA against companies and individuals associated with John Chou and his wife Sherry Liu, who were alleged to have defrauded the bank in the USA by various means. Chou and Liu had a historical relationship with a third party, the Union Bank of Switzerland (UBS), which had a branch in London. UBS was served with the worldwide freezing injunction, to which it responded (as it always did when presented with a worldwide freezing injunction) with an application for a variation of the freezing order to include what has become known as the ‘Baltic proviso’ (derived from Baltic Shipping v Translink [1995] 1 Lloyd’s Rep 673). The order was varied by David Steel J to include the Baltic proviso, which states, inter alia, that nothing in the order should, in respect of assets outside England and Wales, prevent UBS from complying with ‘what it reasonably believes to be its obligations, contractual or otherwise, under the laws and obligations of the country or state in which those assets are situated or under the proper law of any bank account in question’.

Tuckey LJ in the Court of Appeal reviewed the authorities on the effects of a worldwide freezing injunction upon third parties. The first case in which it was recognised that third parties such as banks within the jurisdiction might be in contempt of court if their offices abroad permitted frozen overseas assets to be dealt with in breach of a freezing order was Babanaft International Co v Bassatne [1990] 1 Ch 13. The ‘Babanaft proviso’ was therefore developed so that a worldwide freezing injunction should only bind the party the subject of the order personally and should only be enforceable against third parties in respect of assets outside the jurisdiction if declared enforceable in the country concerned.

Soon after, Derby v Weldon (No. 3 & 4) [1990] 1 Ch 65 outlined a number of objections to the Babanaft proviso. Tuckey LJ considered the objection that, for the freezing order to be effective, the third party (wishing to comply with the English court’s order) would have to obtain an order from the foreign court. The ‘Derby and Weldon proviso’ therefore imposed an additional requirement that persons who were subject to the jurisdiction of the English court with notice of the order were required to prevent breaches of its terms if they were able to do so.

This, however, gave rise to a situation of ‘double jeopardy’ for banks subject to the jurisdiction of both the English court and the courts of the country or countries where they were holding assets of the person the subject of the freezing order. Since certain countries did not recognise or give effect to without notice orders made by the English court and as a result made orders inconsistent with the English court’s freezing order, a bank might find itself obliged to do something by the English court and the opposite by a court abroad. The Baltic proviso was therefore framed to avoid this difficulty.

Before the Court of Appeal, the Bank of China argued that there was no need for the inclusion of the Baltic proviso in the present case or in the standard form of worldwide freezing order as the Derby and Weldon proviso would strike a sufficient balance between providing adequate protection for the party who obtained the order and avoiding double jeopardy for third party banks. The Baltic proviso was said to afford too much protection to third parties because it enabled the third party itself to decide what its obligations were.

Tuckey LJ noted that the Court of Appeal had not previously had to consider the point fully but that the authorities established two general propositions. First, that the limit of the English courts’ jurisdiction required that the effectiveness of freezing orders operating on assets abroad should normally derive only from the recognition and enforcement by the local courts (and it was noted that the English courts’ powers to grant freezing orders were more extensive than in most other jurisdictions). Secondly, third parties amenable to the English jurisdiction should be given all reasonable protection.

His Lordship reasoned that the need to avoid unwarranted extra-territorial jurisdiction, the need to provide reasonable protection to third parties amenable to the English jurisdiction (the usual undertaking as to damages was not deemed adequate) and the need to clarify the Derby and Weldon proviso would usually entitle third parties to have the Baltic proviso added to the worldwide freezing order unless the court considered on the particular facts of the case that it was inappropriate.

The standard form of the worldwide freezing injunction has been amended since this decision and now includes the Baltic proviso. A review of the standard form of freezing injunctions and search orders was commissioned by Lord Justice May, Deputy Head of Civil Justice following concerns that the standard forms were too complicated. Amendments came into force in March 2002 and there is now one standard form of freezing injunction to be used whether the assets to be restrained are in England and Wales or worldwide.

Scope of reasonable legal expenses

In Halifax Plc v Rupert Sydney Chandler, the Halifax obtained a judgment against Mr Chandler in 1995 for £586,008 arising from his default on a mortgage. Some five years later, in 2000, Halifax agreed to accept £17,500 in full and final settlement of its claim in reliance upon an allegedly fraudulent misrepresentation made by Mr Chandler that he was impecunious. The Halifax issued proceedings against Mr Chandler and obtained a worldwide freezing injunction against him, restraining him from disposing of his assets up to a value of £552,000, with the exception of £3,000 to cover the costs of legal advice and representation.

Mr Chandler applied to vary the freezing order to mortgage his Spanish villa to raise sufficient funds to cover his legal expenses in both the action brought by the Halifax and a second separate action he had commenced against a third party prior to the imposition of the freezing order to recover assets alleged to be worth over £2,000,000. An application for summary judgment brought by the defendants against Mr Chandler in those separate proceedings failed and Mr Chandler’s claim was found to have a real prospect of success.

In the Halifax proceedings Park J allowed the requested variation to the order to allow for the mortgage of the Spanish villa, only for Mr Chandler to return before the court just five days later with a second application to vary the freezing order to allow him to remortgage another property for the same purpose of covering his legal expenses for the two actions. Although Park J expressed displeasure at Mr Chandler’s attempt to ‘have a second bite of the cherry’, a capped charge of £10,000 (to be extended by court upon evidence of further legal expenditure) was allowed on the second property to be used for the sole purpose of funding the legal expenses in the Halifax proceedings. Mr Chandler appealed against this last decision, arguing that reasonable legal expenses should include all of his reasonable legal expenses, including those in the separate recovery action rather than only those expenses of the main action in which the freezing order was made.

Clarke LJ in the Court of Appeal stated that a freezing injunction must not operate oppressively and a defendant must not be hampered in their ordinary business dealings any more than is absolutely necessary to protect the claimant from the risk of improper dissipation of assets. Although they were not ordinary business expenses in the usual form, Mr Chandler was in principle entitled to incur reasonable legal expenses in connection with the second action, and the freezing injunction should be varied accordingly. A freezing injunction should not in principle prevent expenditure on bona fide legal expenses in connection with an action which had a reasonable prospect of success and which was on foot at the time the order was granted.

On the facts, however, the appeal was dismissed. Clarke LJ stated that Mr Chandler was entirely protected so far as the second action was concerned due to the ability to make a further application to vary the freezing injunction once the sums allowed to be expended on that action were exhausted. He was also protected in the main action as Park J had expressly allowed a further application once the initial £10,000 was exhausted.

© Herbert Smith 2003

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

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