Seeking Worldwide Freezing Orders from the English court: learning points from recent decisions

Two important judgments have been recently handed down regarding worldwide freezing orders (WFO).

In Isabel Dos Santos v Unitel S.A., the Court of Appeal confirmed the merits threshold for granting freezing orders and the treatment of costs on a contested freezing order application. In Canada Inc v Sovereign Financial Holdings Limited & Others, the High Court provided useful guidance on the factors to be considered in determining whether a real risk of dissipation exists.

Guidance on merits threshold for granting freezing orders and the treatment of the costs of a contested freezing order application

In Dos Santos the Court of Appeal confirmed that the merits threshold for WFOs is equivalent to the test for summary judgment (whether there is a real prospect of success) and the American Cyanamid test for interim injunctions (whether there is a serious issue to be tried).

The Court of Appeal further concluded that there was no general rule that the costs of a freezing order application should be reserved to the trial judge, distinguishing between such costs and the costs of an interim injunction application.

Grounds of appeal

The Respondent made a series of loans to a company the Appellant controlled, Unitel International Holdings B.V. (UIH). The Respondent subsequently brought a claim against UIH in relation to alleged defaults under those loans. The Appellant was joined as co-defendant to the claim, and the Respondent applied for and was granted a WFO against the Appellant. The Appellant appealed the decision on two grounds:

1. The first instance judge had applied the wrong merits threshold when determining whether the Respondent had a "good arguable case"; and
   
   
2. The judge had erred in awarding the Respondent its costs of the application because the ordinary costs order for an interim injunction is costs reserved.

Merits threshold

The traditional test used by the Court to determine whether a freezing order should be granted is that found in The Niedersachsen¹. Under this three-limb test, an applicant must show: (i) a good arguable case on the merits (meaning a case that is more than barely capable of serious argument but not necessarily one which has a better than 50% chance of success); (ii) a real risk of dissipation by the respondent; and (iii) that it is just and convenient for the Court to grant the freezing order.

The Appellant argued that the merits threshold for whether there was a good arguable case was that applied by the Court in Lakatamia Shipping v Morimoto² (ie the applicant has the better of the argument) and not the first limb of the test set out in The Niedersachsen.

The Court of Appeal concluded that the lower merits threshold in The Niedersachsen was the correct test for the following reasons:

1. A higher merits threshold was applied by the Court when determining jurisdiction because the issue of whether a case falls within a jurisdictional gateway would not be revisited at trial. However, in the context of a freezing order, it was invidious for the Court to have to determine in the early stages of proceedings which party had "the better of the argument" in respect of the substantive claim;
   
   
2. The Niedersachsen test has been consistently applied by judges in deciding whether to grant WFOs and the weight of authority supported the application of this test; and
   
   
3. It was a misreading of the Morimoto judgment to say that it had changed the law. On the Court of Appeal's interpretation, the judge had in fact approved the Niedersachsen test.

Notably, the Court of Appeal confirmed that the merits threshold for WFOs was equivalent to the test for summary judgment (whether there is a real prospect of success) and the American Cyanamid test for interim injunctions (whether there is a serious issue to be tried).

Approach to costs of a freezing order application

The Court of Appeal further concluded that there was no general rule that the costs of a freezing order application should be reserved to the trial judge, distinguishing between such costs and the costs of an interim injunction application. An interim injunction was predicated on alleged rights or obligations which had yet to be vindicated at trial. If a claimant was unsuccessful at trial, it followed that the interim injunction should not have been granted. It was therefore more appropriate for the Court to reserve the costs of the application to the trial judge. Conversely, it did not automatically follow that a freezing order should not have been granted even if the substantive claim failed. There was therefore no reason why the same costs treatment should apply to a freezing order application.

Guidance on the factors to be considered in determining whether a real risk of dissipation exists

In Canada Inc v Sovereign Financial Holdings, the Court concluded that the Claimant had established a real risk of dissipation, paying particular regard to the Defendants' past attempts to evade clear liabilities, refusal to provide asset disclosure and use of sophisticated corporate/trust structures.

Key issue to be determined

The Claimant obtained a judgment against the Defendants for unpaid sums under a settlement agreement. Upon discovering a sale listing for a property owned by the Defendants, the Claimant applied without notice for, and was granted, a WFO. It subsequently transpired that the sale was not an act of dissipation. The main issue for the judge at the return hearing was whether there was sufficient evidence concerning a risk of dissipation to enable him to continue the WFO.

Assessment of risk of dissipation

In assessing the risk of dissipation, the Court made the following comments of note:

1. A claimant need not show that dissipation is probable, but the risk must be established on solid evidence and must not merely be a matter of suspicion, fear or speculation.
   
   
2. The Court must consider the cumulative effect of all relevant factors. Other cases are likely to provide little assistance because the assessment is necessarily highly fact-specific.
The non-payment of a judgement debt by itself is not sufficient to justify an inference of a risk of dissipation.


3. A relevant factor is the existence of sophisticated structures such as trusts and offshore companies. Although they should not be regarded as inherently suspicious, they show that dissipation may be easier than it otherwise would be.
   
   
4. Another relevant factor is a history of proven dishonesty, particularly of previous dissipation or conduct akin to it. However, unfocused allegations of dishonesty were of limited value to the Court.
   
   
5. A defendant's failure to provide information about its assets in response to a court order or provide answers to legitimate questions may also be relevant factors.
   
   
6. Submissions that a defendant might be inclined to dissipate based on stereotypes about the defendant are not good evidence.
   
   
7. The various factors are not watertight legal categories but merely a way for the Court to organise its analysis.

The Court concluded that the Claimant had established a real risk of dissipation, paying particular regard to the Defendants' past attempts to evade clear liabilities, refusal to provide any asset disclosure and access to sophisticated financial structures.

Key learning points and implications

The two judgments provide clarity around the law for granting freezing orders and the treatment of application costs. The Court of Appeal's confirmation in Dos Santos that the traditional (lower) merits threshold in The Niedersachsen applies to WFOs is good news for claimants concerned about protecting against the dissipation of a defendant's assets pending judgment/enforcement. However, the Court of Appeal's judgment is not entirely claimant-friendly; it acknowledges the invasive nature of WFOs and emphasises that the second and third limbs of the Niedersachsen test, and the usual requirement that the applicant provide a cross-undertaking in damages, act as safeguards against the remedy being granted too freely. Indeed, as shown by Canada Inc, the Court will give careful consideration as to whether a real risk of dissipation has been made out and is unlikely to be persuaded by claimants seeking to rely on vague and circumstantial evidence.

The DLA Piper Litigation and Arbitration team is ranked Band 1 for Civil Fraud in Legal 500 and regularly acts on complex, cross-border, high value disputes across a wide range of sectors and jurisdictions, including for parties seeking or defending WFOs. If you would like to discuss any of the issues raised in this article, please contact Charles Allin, Tom Laidler, Hui Chee or your regular DLA contact.

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¹[1983] 2 Lloyds Rep 600
²[2019] EWCA Civ 223