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08 Feb 2021

Worldwide freezing orders and third parties: practical steps for claimants and third parties

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Worldwide freezing orders (“WFOs”) are a crucial tool in the fight against fraud, as fraudsters will often move assets across multiple jurisdictions.  But how can claimants before the English Court freeze assets across the world?  What are the risks of trying to enforce an order from the English Courts internationally?  And how should third parties react when they are notified of an English WFO?

Freezing injunctions and third parties

A freezing injunction orders a respondent (usually a defendant in fraud proceedings) not to “deal” with certain assets – the respondent can be the defendant, but it can also be a third party.  A freezing injunction can be domestic (i.e. it applies only to assets in England and Wales) or worldwide (i.e. it applies to all the respondent's assets, anywhere in the world).

It is usually crucial for claimants to notify third parties (such as the respondent’s bank, agents and employees) of a freezing injunction.  A fraudster may be willing to risk contempt of court by moving their assets in breach of an injunction.  However, third parties such as banks usually obey these orders.  Consequently, it is usually the notification to third party that truly freezes assets.

The legal position is very clear when the third party is in England:  they are bound by freezing injunctions if they are notified of them.  Consequently, they will usually take swift action to stop any dealings in assets they control (e.g. money in a bank account).  The position is different for third parties outside of the jurisdiction.  They are usually under no legal obligation to comply with the injunction (and indeed may have contractual obligations that stop them from doing so).

The ability to notify third parties of a freezing injunction can be a vital tool for claimants.  However, a recent English High Court decision is a reminder that this power must be exercised with caution – particularly where third parties are located outside of the jurisdiction.

The recent judgment in YS GM Marfin II LLC & Ors v Muhammad Ali Lakhani & Ors

In this case, the claimants obtained a WFO against the defendants.  The claimants' solicitors subsequently wrote to individuals and financial institutions outside of the English jurisdiction who were connected with the defendants.  The letters stated: "it is a contempt of Court for any third party knowingly to assist in or to permit a breach of [the WFO], subject to the terms of paragraph 19 regarding persons outside England & Wales".  The letters also quoted the notice on the first page of the WFO which stated that third parties could be held in contempt, imprisoned and/or fined. 

The defendants complained of this to the English Court and applied to discharge the WFO.  Amongst other things, they said that the letters misrepresented the effect of the WFO.  They argued that the letters implied that the WFO was binding on third parties outside of the jurisdiction, when in fact it was not. 

The Judge stated that it was not improper for claimants to notify third parties outside of the jurisdiction of WFOs, as part of a legitimate aim to make the WFO effective.  However, he concluded that the claimants' solicitors' letters "went too far”: the reference to contempt of court was not appropriate for letters addressed to parties outside of the jurisdiction, given that such parties were unlikely to be bound by the WFO (and so could not be held in contempt). 

The Judge decided that the claimants' conduct did not justify a discharge of the WFO.  Amongst other things, he concluded that the claimants had not deliberately misrepresented the effect of the WFO.  However,  the Judge did require the claimants to send corrective letters.

Effect of WFOs outside of the jurisdiction

This judgment is an important reminder that:

  1. WFOs do not usually have any legal effect on persons outside of England & Wales, other than the defendant and their officers/agents
     
    Most parties outside England and Wales are not affected by a WFO (unless the local courts have formally recognised the WFO), even though it is described as 'world wide'.  Usually, the only parties abroad who are affected by a WFO are the defendant and a small number of closely connected parties (e.g. if the defendant is a corporate entity, their officers will be affected).
  2. Claimants and their lawyers should be careful not to misrepresent the effect of the WFO to third parties
     
    Claimants should never overstate the effect of an injunction.  In the most serious cases, claimants who misrepresent the effect of a WFO risk losing the injunction altogether.  In Euroil Ltd v Cameroon Offshore Petroleum Sarl, the claimant (incorrectly) informed third parties that an injunction proved the defendant's wrong-doing.  The English Court found this to be an abuse of process and discharged the injunction. 

Practical steps for claimants seeking to enforce WFOs outside of the jurisdiction

  1. Before applying for the WFO, consider where you wish to enforce it and whether it will have any legal effect. The English Commercial Court will usually only grant a WFO if you agree not to seek to enforce it outside of England & Wales without first obtaining the English Court's permission. That means making a further application in England before seeking to enforce abroad. You may therefore want to seek permission to enforce in any key jurisdictions at the same time as you apply for the WFO.
  2. It is important to determine at the outset if this is going to be possible. For example, many common law jurisdictions allow enforcement relatively easily. On the other hand, some civil systems do not recognise freezing orders, and would not allow enforcement of an English WFO. If the assets and the defendant are in a jurisdiction that will not allow enforcement, the WFO will have no material effect.
  3. Even if the WFO is not enforceable in a given jurisdiction, you can still notify third parties of the terms of the WFO. This can be an effective tactic: many third parties will be unwilling to help a respondent breach an English Court order even if the order has no legal effect on the third party. However, any notification should be carefully worded to avoid any risk of misleading third parties as to the effect of the WFO.

Practical steps for third parties outside of the jurisdiction who are notified of WFOs

Why it matters

If you are bound by a WFO and you breach it, you may be found to be in contempt of the English Court.  This may result in a fine, seizure of assets or even imprisonment.  But there is also a risk of civil claims for damages (for example, a claimant may argue that you conspired with the defendant to circumvent the freezing order).

On the other hand, the consequences of complying with a WFO which is not legally effective can be extremely serious.  For example, a bank which wrongly freezes a customer's account may face regulatory and civil action in their local jurisdiction.

Practical steps

  1. Carefully read the terms of the WFO in full (not just the sections that have been drawn to your attention by the claimants' solicitors).
  2. If you are an officer or agent (acting under power of attorney) of the defendant, you are likely to be bound by the WFO (regardless of whether you are in the jurisdiction).
  3. If you are subject to the jurisdiction of the English Court and you are served with the WFO while in the jurisdiction, you may also be bound by it. For example, if you have a place of business in England and you are served with the WFO in England, but subsequently travel abroad, you may still be bound by the WFO.
  4. If neither of the above scenarios apply, check whether the WFO has been recognised by the court or relevant body in your jurisdiction. If it has not, the WFO is unlikely to have legal effect.
  5. It is almost always worth obtaining legal advice on English WFOs. They are serious orders and can have extremely serious consequences. However, they often also contain an obligation on the claimant to compensate third parties for any loss they suffer as a result of the WFO, and this can include the costs of seeking legal advice on the WFO. If a party outside England is served with a WFO, it is often worth asking the claimant early on if they will cover the costs of the third party's legal advice. That will often focus the claimant's mind on whether the injunction actually has an effect on that party.
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