By Lucy James, Partner, Co-head of Dispute Resolution and National Head of Commercial Litigation and Sam Robinson, Senior Associate, at Trowers & Hamlins
Ultra-high and high-net-worth individuals understandably take a keen interest in protecting their assets and planning for the future. Wealth is often structured across different jurisdictions with a focus on tax efficient structures and family convenience but that does not mean assets are out of reach, particularly where a dispute arises.
For individuals defending High Court proceedings in England and Wales, a claimant may seek a freezing order (including on a world-wide basis) restraining how a defendant’s assets are dealt with. Such proceedings are often high-value commercial claims and the claimant will want to ensure that, if successful at trial, assets are properly preserved until judgment is obtained and enforced.
Freezing orders offer this protection to a claimant but they are not easy to come by. Such orders are the “nuclear weapon” in the Court’s arsenal. The English Court will only exercise its discretion to make such an order if certain criteria are met, including the claimant being able to demonstrate a real risk of dissipation.
If granted, a freezing order can have a significantly detrimental effect, limiting transactions in relation to assets such as bank accounts, shares, land (including proceeds of sale), works of art and vehicles. As noted above, it can affect assets not just within England and Wales but also on a world-wide basis. Typically freezing orders that go beyond these shores are limited in effect to the underlying value of a claim, but in rare cases they can be unlimited to cover a defendant’s entire global portfolio.
Freezing orders do not just affect defendants but also third parties who are not involved in the proceedings. For example, family members or business associates need to avoid breaching the terms of a freezing order or assisting the respondent in breaching it. This is made clear by the freezing order carrying a penal notice on its face, stating that “any other person” who knows of the order and does “anything” to help or permit the respondent to breach the terms, will themselves face proceedings for contempt of court, a fine, a seizure of their assets or imprisonment.
A particular scenario which can arise in divorce proceedings is where third parties, with no involvement in the underlying dispute whatsoever, can find their assets (including monies due to them) frozen by orders of Family Court judges. Individuals and corporate bodies involved in business dealings with high-net worth individuals can unwittingly become entangled in divorce proceedings because there is a dispute about property and assets which are said to fall within the matrimonial estate. Loan arrangements between business partners can be particularly vulnerable to being attacked as “sham” transactions. The Family Court will be keen to act in a protectionist manner and can more readily grant a freezing order affecting third party assets to preserve the matrimonial estate pending resolution. The court may go further and join those third parties to the proceedings. In such situations, those third parties will need separate representation to ensure their rights and assets are appropriately represented and to seek to be discharged from the proceedings at the earliest opportunity.
Another scenario in which freezing orders can affect third parties is where an individual dies during court proceedings and judgment is given against them. Heirs to the individual’s estate should anticipate that the opposing party might seek to join them to the proceedings and set aside any transactions made prior to the date of death (on the basis that these were “transactions at an undervalue”). In any event, the estate assets will likely be closely monitored by the opposing party in case of dissipation before enforcement. Any move to sell or move an estate asset may act as a trigger for an application for a freezing order.
It does not always follow the court will grant such an order because the purpose of a freezing order is not to provide a claimant with security, but to restrain a defendant from evading justice by disposing of, or concealing, assets. Individuals who find themselves in such situations can still conduct their personal affairs in legitimate ways and as they have always conducted them. However, it is vitally important for any individual in such a situation to ensure they have their own representation (separate to the estate) and can demonstrate a legitimate purpose for any disposal of any estate assets that they might make. Where assets are disposed of (such as property) they will want to maintain an appropriate audit trail of any sale proceeds, such as the payment of tax or other expenses of the estate.
As noted above, freezing orders can have a wide reach and extend beyond those involved in underlying (commercial or matrimonial) disputes. Third parties should readily seek strategic advice to protect their position.
