Lawyers must fix the problems with gagging orders before it is too late
A freezing order is an interim injunction that restrains the individual subject to the order (“the Respondent”) from disposing of or dealing with their assets to ensure that they are preserved until judgment can be enforced. It is normally obtained before the proceedings begin, and without notice to the Respondent.
The consequences of a freezing order are extremely burdensome, not only on the Respondent but also on their family. In seeking to prevent a Respondent from moving, hiding or otherwise dissipating their assets the order prevents the Respondent from spending any money save for their ordinary living, business and legal expenses. If the Respondent breaches the freezing order they may be held in contempt of court which could lead to a fine, imprisonment or seizure of assets.
A freezing order is limited in amount to the approximate value of the applicant’s claim (plus interest and costs) and is not designed to prevent the individual subject to the order from spending money in ways which he can show are legitimate. Moreover the party on the receiving end of the order should not be prevented from paying debts as they fall due. Neither does it give the applicant security for his claim taking effect against the respondent personally rather than giving any proprietary rights over their assets. This means that it does not provide the claimant with any advantage in the event that the respondent becomes insolvent.
Being on the receiving end of a freezing order has a very real and potentially drastic impact on any Respondent. The significant repercussions are heightened for a Respondent with limited financial resources with which to mount a challenge to the order, seek a variation, or challenge the way it is being used by the Claimant. A freezing order is often obtained without notice and once served with the order the Respondent has a very short space of time in which to comply if he is to avoid contempt of court. A Respondent is normally required to disclose under oath the value, location and details of all of their assets exceeding a minimum value. This obligation in itself is not always straightforward and without legal advice the Respondent is already at significant risk of non-compliance.
By this time, the freezing injunction will already have been served on related third parties such as the Respondent’s bank and accounts frozen before any attempt can be made to transfer funds. Whilst provision will have been made in the order for ordinary living expenses, at this stage, a Respondent has had no input into the quantum of any such provision and in any event banks can often make it extremely difficult to extract any funds at all until they are satisfied that allowing a withdrawal will not amount to a breach of an order. For example, were a Respondent to have more than one bank there may need to be a line of communication opened to ensure that total withdrawals are not in excess of the sum provided by the order. Similar practical difficulties can be experienced in relation to the provision of funds for legal expenses, particularly shortly after the order is served.
The practical effect of this is a complete freeze of all accounts in banks which have received a copy of the order regardless of the exceptions to the order. Whilst resolving the position with the bank should happen relatively quickly, the Respondent has at this time had no say in what is considered to be reasonable by way of provision for their day to day living expenses and could find themselves without sufficient resource to cover their immediate needs. A freezing injunction should not operate in this way, but often does, particularly if a Respondent has limited resources, and the Claimant’s solicitors are particularly enthusiastic.
As well as the time consuming (and therefore expensive) exercise in complying with the ancillary orders often found in a freezing order, the Respondent should also to be thinking about whether to challenge its grant. If a freezing order is obtained without notice, the injunction will be granted on an interim basis only, with a return date listed to take place within a short time period, normally 7 to 14 days from service of the order. The return date hearing is the Respondent’s opportunity to present their case and seek to have the freezing order varied or set aside. To obtain a freezing order, the applicant must establish:
As the Respondent is unlikely to have been present at the first hearing making the freezing order, the applicant is also required to disclose to the court all relevant material including information that may go against them. The onerous duty of full and frank disclosure combined with the stringent criteria that the applicant must meet in order to obtain a freezing order often give rise to grounds to challenge the freezing order.
However the cost of instructing solicitors to conduct an assessment of the application and mount a challenge is extremely high given the short time frame and volume of work required in order to do so. The same is true of seeking to vary the order (most commonly the exception for ordinary living expenses) or challenge the way in which the Claimant is seeking to police the order, if this is oppressive. A Respondent with limited financial resource may feel that their time and money is spent fighting the substantive underlying claim (with all the normal costs and risks of litigation) irrespective of the merits of a potential challenge to the order.
This presents a challenge for the Court, in ensuring that the Claimant does not police the order in an oppressive fashion, and in not going too far in granting more and more draconian orders, mistakenly interpreting a lack of challenge as a lack of a substantive case, rather than a pragmatic commercial decision.
It also presents a challenge for the Claimant’s solicitors. All too often faced with a Respondent who either has no representation, or where the Respondent’s lawyers have been instructed not to mount what would otherwise be good challenges, because of the risk and the expense, the Claimants solicitors push the Respondent into more and more onerous obligations ostensibly pursuant to the order, which the Respondent cannot challenge. A lack of a challenge in response to this activity can also embolden the Claimant in relation to the orders they ask the Court to make.
The danger in adopting this approach is that the harm to the Respondent increases. If the order is later found to have been wrongly granted, following for instance the Respondent’s successful defence of the proceedings, the cross undertaking in damages increases in value. The prudent solicitor acting for a Claimant in these circumstances should pause and consider if being overly aggressive in how the order is policed or enforced is actually in the best interests of their client. They should ask themselves, is obtaining this information, or preventing the Respondent doing this thing, necessary to achieve what my client wants?
In light of the above, there may be a case for the Court being required to consider the financial position of a Respondent in exercising its discretion in relation to the granting of orders sought by the Claimant’s solicitors, and whether it is limited resources meaning that a challenge is not being mounted, rather than a lack of merit. Practically speaking, this may be difficult. It does certainly seem to be the case, however, that a freezing injunction can operate in a much more draconian way for a Respondent who, because of insufficient funds, is not able to challenge either the order or the way it is being used by the Claimant, than it might for a Respondent able to afford to mount these sorts of challenges.
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