In a decision this week, the English High Court has clarified the extent of a third party secured creditor's duties, when put on notice of a freezing order, and suggested a more limited duty than that previously articulated by the court. Notwithstanding this, the position remains that when a third party is put on notice of a freezing order of the English High Court, it is not something that it should take lightly.
The terms of the penal notice contained in a freezing order, explaining the possibility of being in contempt of court for breaching the terms of the freezing order, mean that the third party should act with caution and take legal advice, before taking any steps that may conflict with the terms of the freezing order.
Doing so is even more important when the third party is owed money by a respondent to a freezing order, and it may wish to take, or already be taking, its own bona fide independent enforcement action against that respondent. The importance of doing so was well summarised by Lord Denning in the case of Z Ltd v A-Z and AA-LL  QB 558, when he stated:
"Every person who has knowledge of [the injunction] must do what he reasonably can to preserve the asset. He must not assist in any way to the disposal of it. Otherwise he is guilty of a contempt of court."
Mr Justice Mann in the Chancery Division has provided some helpful guidance and clarification to third parties who find themselves in such a position, in the case of Taylor v Van Dutch Marine Holding Ltd & Ors  EWHC 636 (Ch). Reed Smith's Ben Summerfield (partner) and Simon Greer (senior associate) acted for the successful third party applicant in this case (Applicant).
The Applicant, a hedge fund, was party to a loan and debenture with the Second Defendant in the underlying claim. In the underlying claim, the Claimant had obtained a freezing order over certain of the assets of the Second Defendant, which the Applicant was put on notice of.
The Second Defendant had failed to pay sums owing to the Applicant under the terms of the loan, thereby entitling the Applicant to enforce a variety of security rights against the Second Defendant's assets. However, before enforcing its security rights under the debenture against the Second Defendant, the Applicant, wary of the terms of the freezing order, wanted to ensure that there was no question that its exercise of its valid security rights against the Second Defendant could be considered to be a breach of the terms of the freezing order. Accordingly, it sought the Claimant's consent to a variation of the freezing order, so as to recognise its rights under its debenture against the Second Defendant. The Claimant refused to provide this consent, leading to the Applicant applying to the court for an order granting a variation of the freezing order.
In its application, the Applicant drew the court's attention to the decision of Mr Justice Colman in Gangway Ltd v Caledonian Park Investments (Jersey) Limited  2 Lloyds Rep 215. That case provided authority for the following:
- The purpose of a freezing order is not to provide the claimant with security for its claim; its purpose is to restrain the defendant from evading justice by disposing of assets otherwise than in the ordinary course of business so as to make itself judgment-proof.
- When a third party is given notice of a freezing order, it is obliged to comply with it in so far as possible. However, where the third party has a security interest in an asset of a respondent subject to the freezing order, it is entitled to exercise its rights in accordance with its own commercial judgment, provided that it does not, thereby, do something that conflicts with the underlying purposes of the freezing order (i.e., prevention of the dissipation of assets by the respondent).
- However, notwithstanding point 2 above, Mr Justice Colman considered that a third party in this position should come to court to have the relevant order varied, so as to permit it to realise its security interest, this being its "duty" in light of the freezing order.
Mr Justice Mann found in favour of the Applicant and granted a variation to the freezing order so as to recognise the Applicant's security rights under the debenture it had with the Second Defendant. In doing so, Mr Justice Mann eloquently summarised the purpose of a freezing order and the scope of its effects on third parties, when he stated in his judgment:
"In the absence of authority it would seem to me to be clear that principle does not stand in the way of a secured creditor enforcing its security over charged assets caught by a freezing order. The whole point of a freezing order, as is now well-established, is to prevent a defendant from dissipating its assets improperly in the face of a claim by the claimant. It is a remedy which operates personally against the defendant (or any other person identified as a respondent in the injunction and against whom the injunction is specifically directed). It does not operate so as to give security to the creditor; and it does not operate so as to affect the genuine rights of third parties over those assets."
Further, Mr Justice Mann clarified the position of a third party with a security interest over an asset frozen by a freezing order, when he stated:
"Thus, in my view, a third party with security over property which is frozen by the freezing order would not need to obtain permission in order to exercise that security because the exercise of disposal rights under that security would not be an act prohibited by the order. If, for example, the third party uses a power of sale in order to dispose of the property, that would not be a disposal by the defendant notwithstanding any technicality which might arise out of the fact, which is common to many securities, that the exercise of a power of sale is technically done as agent for the mortgagor. Nor would it be any form of dissipation because the secured debt already exists and the secured property is already encumbered with it. The enforcement by the mortgagor would not be an infringement of the letter of the order; nor would it be contrary to the spirit of the order which, as I have explained, does not operate so as to give the claimant a prior right in the form of security over the assets. If the freezing order does not destroy, or affect, the rights of a chargee or mortgagee (which it does not) there is no reason why it should operate so as to restrain the exercise of the rights of that person. The exercise of those rights would not infringe the order. It follows therefore, in my view, that strictly speaking a chargee or mortgagee, in a normal case, would not need to obtain a release of variation of the freezing order."
Having considered the decision of Mr Justice Colman, the Judge also decided to provide his view on the necessity for a third party to obtain a variation of a freezing order in these circumstances. Mr Justice Mann noted that Mr Justice Colman had suggested there is some sort of "duty" on a third party with a security interest over an asset of a respondent to a freezing order, to apply to vary the freezing order for permission to exercise its security. Mr Justice Mann disagreed with that analysis.
With reference to Lord Denning's quote set out above, from the Z Ltd v A-Z and AA-LL case, Mr Justice Mann was keen to emphasise that a freezing order is concerned with preventing disposal of assets by the respondent to the freezing order; however, it is not concerned with preventing a third party, who has its own rights against a respondent to a freezing order, exercising those rights, which are not a "disposal" or "dissipation" of an asset which a freezing order is designed to prevent.
In the circumstances, Mr Justice Mann concluded that he did not consider that a third party with security rights over the assets of a respondent to a freezing order needs to obtain a variation of a freezing order in order to exercise those security rights. He therefore disagreed with Mr Justice Colman that there is some sort of "duty" on a third party to obtain a variation to the freezing order in these circumstances and concluded:
"In all the circumstances I prefer the principled approach which determines that, in a normal security enforcement situation which does not involve anything which could properly be classed as a disposal by the defendant, which is not collusive (in an infringement of the order) and which does not amount to aiding and abetting a breach of the order, a secured creditor needs a variation of a freezing order. That approach also happens to lead to a sensible practical result. If it were not correct then in every freezing order case a secured creditor would have to apply for a variation, which would run up unnecessary costs, not least because, in the absence of some suggestion of collusion or sham, the claimant could never object to the variation. It may be that in some complex cases the anxiety of a secured creditor to tread warily in an apparently hostile litigation environment would lead to a safety-first approach of seeking a variation, but I do not consider it to be generally necessary in what I will call a standard case, of which this is one."
Mr Justice Mann's decision is an interesting clarification of the duties of third parties who are put on notice of a freezing order. It appears to represent a more bullish analysis of what a third party has to do when given notice of a freezing order, if it wants to enforce security over assets that are frozen by the freezing order, than that of Mr Justice Colman in the Gangway decision. In particular, his conclusion that there is no "duty" to seek a variation of the freezing order is an interesting development that will come as welcome news to third parties in receipt of freezing orders.
Ultimately, however, the implications of a breach of a freezing order remain severe and a prudent third party should tread carefully before taking any action in relation to assets that are frozen by a freezing order. Mr Justice Mann himself recognises, at the end of the conclusion he reached above, that "the anxiety of a secured creditor to tread warily in an apparently hostile litigation environment would lead to a safety-first approach of seeking a variation". Accordingly, we strongly recommend that any third party who is put on notice of a freezing order should still take legal advice before taking action against assets frozen by the freezing order and, if there is any doubt that the proposed action may infringe the freezing order, the consent of the party who has the benefit of the freezing order, and the court if necessary, should be sought.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.