UK: Knock, Knock, Beware

Last Updated: 23 March 2007
Article by Kathryn Garbett and Claire Broadbelt

Company directors must know their rights when confronted with allegations of fraud.

In the first bulletin of this series, we set out a brief explanation of the types of "Without Notice Order" that can be obtained against an individual and their intended purpose. In the second bulletin we set out the basic Dos and Don'ts guide for anyone served with a Search Order or Freezing Order. In this bulletin we consider how and when it is best to respond to "Without Notice Orders".

From the outset everyone concerned, including the Claimant, both parties’ legal advisers and the Court, should not lose sight of the fact that Without Notice Orders are preservation Orders and not penal Orders. Contrary to the views of some over zealous Claimants and their legal advisers, the Orders are not designed, and nor should they be allowed to be used, to destroy a Defendant. As we set out in the first bulletin, the purpose of these Orders is to secure and preserve assets, information and documentation only.

If the Freezing Order is to stay in place until the dispute between the Claimant and the Defendant is tried or settled then a Defendant's representatives can and should actively progress the following:

1. Living expenses

A Freezing Order will state a maximum weekly amount that a Defendant will be permitted to withdraw from a nominated bank account to cover his ordinary (usual day to day) living expenses. The maximum figure will have been suggested by the Claimant and considered by the Court when making the Order. However, this figure is a guesstimate, the Claimant in many cases is likely to have little or no idea of the Defendants financial commitments. At the outset, a Defendant's solicitor should request a detailed breakdown of the Defendant's ordinary living expenses and if necessary, should request that the Claimant or the Court agree to increase the maximum figure to ensure the Defendant's essential expenses are met i.e. mortgage payments, utility payments and school fees and that the Defendant is not penalised by the Order. The Defendant is entitled not to have the additional stress of worrying about his day to day living.

Depending on the Defendant's normal standard of living it is extremely unlikely that the ordinary living expenses provision will cover everything that the Defendant may be accustomed to spending. While it may include enough to cover normal outgoings such as mortgage payments, utility payments and basic essentials, a Defendant is likely to find that any unusually extravagant social life will have to be put on hold.

2. Legal expenses

The Order will normally permit the Defendant to spend either a set or a "reasonable" amount on legal representation, subject to informing the Claimant's solicitors of the source of the money. If the Claimant has evidence in the form of a proprietorial claim to suggest that all of the Defendant’s funds actually belong to the Claimant then it can refuse to release any funds. The Claimant may agree to release a set amount of funds, on the basis that if the Claimant later succeeds in establishing that those funds belong to him then he can recover them from the Defendant’s solicitor. Therefore, a Defendant may first have to identify untainted funds from which he can finance his legal costs or seek to find a third party funder i.e. someone who is willing to pay his legal fees, usually a family member or close friend. Often a Defendant's solicitor will need to apply to the Court to vary any set amount under the Order to permit the release of additional funds for the payment of legal fees.

3. The ability to operate the Defendant's company/business

If the Defendant has a company or business that is also caught by the terms of the Freezing Order it can cause enormous difficulty. For example, the Claimant's solicitor may be entitled to insist upon seeing (in advance) each vouching invoice before releasing payment. Depending upon the size, nature and complexity of the business the Claimant's policing of the Order could prove to be too onerous and debilitating to the business. The Defendant's solicitor can seek to minimise the damage caused to the business by agreeing with the Claimant's solicitor a mechanism to allow the business to continue to operate effectively by making variations to the Order, or providing undertakings in respect of the Claimant's concerns. If a compromise with the Claimant's solicitor is not possible then the Defendant's solicitor must apply to the Court to vary the Order.

4. Consider putting security in place to discharge the Freezing Order

The Freezing Order can be discharged if the Defendant can put security in place. Since a Freezing Order is merely a preservation order, provided the Defendant can satisfy the Court that the sum of money named in the Order cannot be dissipated then the Court will discharge the Order. It is common for a Claimant to put a charge on the Defendant's home if there is sufficient equity in the property or for a Defendant to pay the sum of money into Court or into a bank account held jointly between the Claimant and Defendants solicitors.

The obvious effect of discharging the Order is that the Defendant's accounts and assets will no longer be frozen. As a consequence, the Defendant will no longer be accountable to the Claimant for his spending and importantly will not have to provide any further asset disclosure. The Defendant will also be able to fund his defence and be free to run his company or business.

5. In the short term assess the evidence and consider an application to set the Order aside

A Defendant's solicitor must be capable of understanding the nature of the very serious claims that have been made against the Defendant and in a relatively short period of time assess the strength of the Claimant’s evidence. To challenge the basis upon which the Orders were granted, the solicitor needs to identify any weaknesses in the Claimant’s case and exploit them if they are to attempt to discharge the Order at the outset.

It is not uncommon when the Defendant is afforded the opportunity to scrutinise the Claimant's evidence, produce his own evidence and present his version of events for a Claimant’s case to start to fray. Often the Claimant may have embellished or overplayed the evidence it has against the Defendant and more seriously may not have complied with its own obligations of full and frank disclosure to the Court, in order to present a bias view and secure an Order at a Without Notice hearing.

6. Prepare the Defendant's Affidavit of Assets and disclosure

The Defendant will be required under the Order to provide within a fairly short period of time (usually a matter of days) an Affidavit of his assets wherever they are in the world. In addition, he may be required to deliver up documentation such as identity documentation, asset documentation, evidence of trading with particular entities and/or in particular products. It is essential that the Defendant gets this disclosure right. The Order is likely to contain a Penal Notice and the Defendant's evidence is given on oath. If at a later stage the Claimant can prove that the Defendant has failed to comply with the terms of the Order or has been less than truthful in his Affidavit he may be found to be in contempt of Court and could face a fine and/or imprisonment.

7. The Return Date

The Order will include a Return Date, which is a date that the Court requires the Claimant and the Defendant to attend the Court. The purpose of the Return Date is to allow the Defendant an opportunity to challenge the basis upon which the Court granted the Order. It is also an opportunity for the Claimant to apply to the Court to vary the Order. In practice the Return Date is often only a couple of days after the date upon which the Order was granted. As a result it is often extremely difficult for a Defendant to be in a position to discharge the Order at the Return Date as he and his legal advisers will still be in the initial stages of reviewing the Claimant’s evidence and obtaining and reviewing the Defendant’s documentation. That said, in some circumstances the Claimant's case will be so fundamentally flawed that it will be possible to discharge the Order at the Return Date or even earlier.

8. Assess the evidence and devise a strategy for going forward

It is essential that the Defendant's solicitor devise a strategy at the outset that takes into account factors such as the evidence, what the Defendant ideally wants to achieve and what he can realistically achieve given his available resources and time frame.

There are also a number of external considerations that will affect each case. It is important for the Defendant's solicitor to assess what the Claimant is ultimately seeking to achieve and within what time frame. The Claimant may have sought the Order against the Defendant to primarily secure information or documentation to assist in pursuing a claim against a much "bigger fish" and has no real desire to pursue contested proceedings against the Defendant. Equally, a number of Claimants, for example FSTE 100 companies and banks, may wish to avoid publicising the fact that its security measures have been breached or undermined for fear of damaging investor confidence and its share price. In these circumstances, the Claimant may be content to allow the Defendant to provide evidence of his wrong doing to enable it to implement more stringent checks and balances, and look to achieve a commercial settlement in a relatively short period of time.

Conversely, the Defendant may be the Claimant's key target and it may intend to make an example of him. The Claimant may be looking to try to achieve some cathartic sense of justice. If so, it is highly unlikely that any amount of commerciality or reason will prevail!

Above all, a Defendant should not under estimate the value of having professional support from a team of individuals who are experienced in this area of law and understand the enormous difficulties and personal stress that such a draconian Order can impose. The Defendant's solicitor can alleviate some of the pressures on the Defendant, his family and business.

The facts of the case will ultimately determine whether an Order can be discharged and whether the underlying case can be resolved by settlement or whether it should be defended to trial. However, the initial reaction to the knock on the door and the decisions taken in the first few hours are crucial to ensuring that a Defendant's options on future strategy are not prematurely restricted.

The first critical steps

For anyone presented with allegations of fraud and Court Orders, the first critical steps must be:

  1. Say nothing
  2. Do nothing
  3. Call an expert defence team

An experienced solicitor will ensure that, from the outset, the Claimant has fully complied with their obligations and that they do not seek to go beyond the terms of the Order during the course of the litigation. An experienced defence team will skilfully build the case in challenge and attack the Claimant's case.

This article is only intended as a general statement and no action should be taken in reliance on it without specific legal advice.

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