Prevention of Asset Stripping: Worldwide Freezing Orders

Introduction

Claimants in international arbitration will sometimes face recalcitrant respondents with operations, affiliates and assets in numerous jurisdictions. The risk that such a respondent will take steps to ‘strip’ itself of assets so as to make any (prospective) award unenforceable is often all too real. This chapter considers the availability of freezing orders, in particular worldwide freezing orders, in support of the arbitral process as a tool to restrain respondents from engaging in this sort of conduct. It is primarily focused on the well-established jurisdiction of the English courts to grant this relief, which has been cited as one reason (among many) why parties might wish to choose London as the legal seat for their arbitrations.^[2] The chapter also considers when the English courts may be prepared to grant freezing relief in support of foreign-seated arbitrations, or against non-parties to an arbitration, and compares the position in the United States and some civil law jurisdictions.

What is a freezing order?

The English court formerly described the freezing injunction as a ‘draconian remedy’ and as one of the law’s two ‘nuclear weapons’.^[3] Nowadays, it is a weapon deployed with some regularity. In the international arbitration context, a freezing order is likely to be a form of personal (in personam) relief. It does not act to provide any security over the assets themselves.^[4] Rather, it operates to prevent a respondent from dealing with its assets in certain specified ways, up to a value threshold, so that they may be available to satisfy any judgment (or award), and prevents third parties on notice from aiding or abetting any breach of the order.^[5]

A freezing order is usually coupled with an asset disclosure order (requiring the respondent to disclose the location, value and details of its assets by letter and then affidavit) and is given a coercive edge by contempt of court sanctions in the event of its breach.^[6] Freezing orders can be applied for in respect of assets located either within the territorial jurisdiction of the English court (a domestic freezing order) or anywhere in the world (a worldwide freezing order (WWFO)). Whether domestic or worldwide, and whether granted prior to, during or following the conclusion of arbitral proceedings, freezing orders can support the enforcement of arbitration awards.^[7]

Threshold requirements for freezing order relief

The substantive test applied by the English courts for the grant of a freezing order in aid of arbitration is broadly the same as that for the grant of a freezing order in aid of litigation. It is convenient, therefore, to consider the threshold requirements a party must establish to obtain relief before considering the particular requirements in the context of arbitration.

As a preliminary step, an applicant will need to show ‘grounds for belief ’ that the defendant holds assets on which the order could bite.^[8] If the applicant is unable to identify assets, then the court will not grant a WWFO as it would have no practical utility. Having done so, it is for the applicant further to establish that:

• ‘the applicant for the order has a good, arguable case’ as to the merits of the underlying substantive claim that the freezing order seeks to support;
• there is ‘a real risk that judgment [or award] would go unsatisfied by reason of the disposal by the defendant of his assets, unless he is restrained by the court’ (i.e., a risk of dissipation); and
• ‘it would be just and convenient in all the circumstances to grant the freezing order’.^[9]

Taking each of these requirements in turn, first, the meaning of a ‘good arguable case’ in this context does not require an applicant to satisfy the court that a claim will succeed on the balance of probabilities, but a claim that is no more than merely arguable will not suffice.^[10] Although the ‘good arguable case’ test was intended to be straightforward, it has been suggested that extensive case law has resulted in it becoming ‘befuddled by “glosses”’.^[11] Recent authority suggests that what is required of an applicant is to show no more than ‘a plausible evidential basis’ for their claim.^[12] In the arbitration context, where it is for the tribunal, not the court, to assess the merits of the claim, the court will need only to be satisfied (pre-award) that there is a prima facie case to get over this ‘initial hurdle’.^[13] Post-award, a ‘good arguable case’ will have been established by virtue of the award.^[14]

What is meant by a ‘real risk of dissipation’ has been established by case law.^[15] The key principles are helpfully summarised by Mr Justice Popplewell in Fundo Soberano de Angola v. dos Santos as follows:

• when judged objectively, a future judgment (or award) would not be met because of an unjustified dissipation of assets, either by concealment or transfer;
• risk of dissipation must be established by ‘solid evidence’, not mere inference or assertion;
• risk of dissipation must be established against each respondent to the application;
• any alleged dishonesty on the part of the defendant supports a risk of dissipation – dishonesty alone will not suffice;
• that evidence as to whether the respondent uses offshore structures may indicate a heightened risk of dissipation;
• whether the risk of dissipation is unjustified when viewed against the respondent’s usual personal affairs; and
• that each case is fact specific and needs to be assessed on its own merits.^[16]

Following these principles, it is clear that what amounts to ‘solid evidence’ will be a fact-specific enquiry in each case, with the courts willing to take into account numerous factors (for example, ease with which assets could be moved around). However, it will not be enough just to suggest that a respondent is not to be trusted or that a respondent is dishonest. To discharge the burden, the claimant will need to show justification for its suspicion.^[17] Post-award, although something more than a defendant’s failure to pay will need to be shown to establish risk of dissipation, the inference that a recalcitrant award debtor poses a risk of dissipation is more easily drawn and a freezing order will be more readily granted.^[18]

If an applicant is able to meet these criteria, then, since it is an equitable remedy, it will be for the court to decide in its discretion whether it is ‘just and convenient to grant the order’ in all the circumstances.^[19] Usual equitable maxims apply; for example, an applicant’s lack of clean hands may bar relief.

Practical considerations

Aside from the threshold requirements, there are a number of practical consideration of which an applicant needs to be aware. Generally, an applicant will seek freezing order relief on a without notice (ex parte) basis. ^[20] In these circumstances, an applicant is under an obligation to provide all the material facts and law to the court regardless of whether they are helpful to him or her.^[21] A party failing to provide full and frank disclosure, or who fails to continue to comply with that duty up to the return date hearing, faces having the freezing order set aside or cost consequences imposed by the court.^[22] In addition, the applicant will usually be required to provide an undertaking to pay damages in the event that the court finds at the return date hearing that the order should not have been granted in the first place.^[23]

Jurisdiction of the English court

In the arbitration context, the basis for the English court’s jurisdiction will depend on the stage reached in the proceedings. If pre-award, an applicant will usually rely on Section 44 of the UK Arbitration Act 1996 (the 1996 Act); if post-award, Section 37 of the Senior Courts Act 1981 (the SCA).^[24]

Pre-award: Section 44 of the 1996 Act

Section 44 of the 1996 Act permits the English court to exercise powers in respect of specific matters in arbitrations seated in England (and, by virtue of Section 2(3) of the 1996 Act, also in arbitrations seated outside England or where no seat has yet been designated or determined), provided that the parties have not agreed to dispense with these powers.^[25] Those matters include the preservation of assets and evidence for the arbitration and the grant of interim injunctions (which includes WWFOs).^[26]

To preserve the balance of power between a tribunal and a supervisory court, Section 44 has a number of provisions that limit a court’s ability to intervene. In particular, a court is permitted to ‘make such orders as it thinks necessary for the purpose of preserving evidence or assets’ but can only do so (1) in circumstances where relief is sought urgently, (2) with the permission of the tribunal or the other party, or (3) if the tribunal ‘has no power or is unable for the time being to act effectively’.^[27] If a court so orders, any order it makes will cease to have effect on the order of the tribunal.^[28]

To establish urgency, an applicant will need to demonstrate that it could not obtain the same relief from the tribunal within a reasonable time frame. This will be fact-specific. Certain interim measures under Section 44 have become harder to justify in circumstances where the arbitration rules, such as those of the London Court of International Arbitration (LCIA), now allow for the appointment of an emergency arbitrator or for an expedited tribunal.^[29] However, it is generally accepted that freezing order relief sought on a without notice (ex parte) basis will be sufficiently urgent to warrant the court’s intervention under Section 44(3) of the 1996 Act, particularly when relief is being sought at an early stage and the tribunal has not been constituted.^[30]

Post-award: Section 37 of the SCA

Once a tribunal has handed down a final award, it is functus officio and freezing relief sought in aid of enforcement is not directly ‘for the purposes of and in relation to arbitral proceedings’.^[31] Section 44 of the 1996 Act is therefore unlikely to apply. In the post-award situation, a party will need to rely on the English court’s general power to grant injunctions under Section 37 of the SCA. Section 37(1) provides that the High Court ‘may by order (whether interlocutory or final) grant an injunction . . . in all cases in which it appears to the court to be just and convenient to do so’. This broad provision allows the English court to grant a freezing order in support of enforcement of a final award.^[32]

English-seated arbitrations

When dealing with arbitrations that have their legal seat in England, provided the threshold requirements described earlier can be met, and while a court’s power to grant injunctive relief is a matter of discretion, it has been found that the court should ‘take the lead’ in granting freezing orders in support of arbitration (unless there is a reason not to).^[33] This is true both pre-award and post-award.

This remains the case even if the party against whom an order is sought has little or no connection with England. For example, having insufficient or no assets in the jurisdiction will not dissuade the court from taking action, even if enforcement will take place elsewhere.

For example, in U&M Mining Zambia Ltd v. Konkola Copper Mines Plc,^[34] the claimant, a Zambian mining equipment contractor, applied to the court to continue a WWFO (made in support of an award handed down by a London-seated tribunal) against the defendant, the operator of a Zambian copper mine. The defendant argued that grant of a WWFO was not just and convenient because the claimant could seek a domestic freezing order from the courts in Zambia (the jurisdiction in which the assets were located).

Mr Justice Teare held that, provided the threshold requirements were met, the claimant’s ability to obtain freezing relief in Zambia was irrelevant to the question of the English court’s jurisdiction. Teare J pointed to Sections 2 and 44 of the 1996 Act and drew the inference that, if England was the seat of the arbitration, it would be appropriate for the supervisory court to issue orders in support of the arbitration even when there were no assets within the jurisdiction. Teare J recognised that enforcement would take place in Zambia, where the relevant assets were located, but found that the possibility of both the English and local courts granting freezing relief would not itself be a barrier to the English court’s ability to grant a WWFO, since the court’s in personam jurisdiction over the defendant was derived from the London arbitration clause.^[35] The local court in the place where the assets are located may itself provide ancillary relief in support of an English order.^[36]

Foreign-seated arbitrations

The power of the English court to grant freezing relief is not limited to arbitrations seated in England. Section 2(3) of 1996 Act provides that the powers conferred under Section 44 apply both when the seat of the arbitration is outside England and when no seat has yet been designated.^[37] However, it will be harder in such cases to persuade a court to grant a freezing order since it will generally be presumed that the courts at the seat of the arbitration will be the natural forum in which to seek injunctive relief.^[38] Therefore, the English court has to be satisfied that the exercise of its power is appropriate in all the circumstances and may refuse to act if it considers that the fact that the seat is, or is likely to be, outside England makes it inappropriate to do so.^[39]

‘Appropriate’ in all the circumstances

As to when it will be ‘appropriate’ for a court to grant such relief, the point was made by Mr Justice Morison in Econet Wireless Ltd v. Vee Networks Ltd & Ors that the powers of the court to support a foreign-seated arbitration under Section 44 were a ‘long arm reach’.^[40] For the court to be minded to grant such an application, the requesting party would need to answer satisfactorily the question: ‘Why are you asking for an order from this court?’^[41] This will be a fact-sensitive enquiry.

In Econet, the claimant had sought and was granted, on a without notice basis, injunctions against 21 defendants: a Nigerian company and 20 of its shareholders. At the return date hearing, Morison J discharged the WWFO, finding that the claimant had not sufficiently established why relief was being sought from the English court in connection with a dispute arising out of a shareholders agreement governed by Nigerian federal law, and which provided for disputes to be settled by way of arbitration seated in Nigeria. In arriving at his decision, Morrison J provided helpful guidance on the types of cases in which such an order in support of a foreign-seated arbitration might be made. In particular, he stated that this might be appropriate where (1) the arbitration was conducted under English procedural law, (2) the order is intended to secure assets that are located within the jurisdiction, or (3) the order is sought against a respondent who has a connection with the jurisdiction.^[42]

Even if the parties can establish a good reason for making an application to the English court on the above basis, the courts have been hesitant to overstretch their territorial reach in respect of parties who chose a seat outside the jurisdiction.^[43] Consequently, a court will only be persuaded that freezing order relief against a party to a foreign-seated arbitration is ‘appropriate’ in exceptional circumstances.

‘Exceptional circumstances’

In Mobil Cerro Negro v. Petroleos de Venezuela, the court provided guidance on when ‘exceptional circumstances’ might arise.^[44] The salient question was whether the court had jurisdiction to grant a WWFO in support of an arbitration that had not yet commenced but which was to be seated in New York under International Chamber of Commerce Rules of Arbitration. Mr Justice Walker said that the court could grant a WWFO in support of a foreign-seated arbitration, but in the absence of assets in the jurisdiction, an applicant would need to show either that the respondent had a ‘sufficiently strong link’ with the jurisdiction, or that there was ‘some other factor of sufficient strength’ to warrant the intervention of the English court.^[45] In Mobil, Walker J found that the fact that the respondent (the Venezuelan government) had no office or business operations in England, and had no bank accounts, real property or other assets located in the jurisdiction, meant that there were insufficient links to England to ground relief.^[46]

In Eastern European Engineering Ltd v. Vijay Construction (Proprietary) Limited, evidence before the court that the respondent held shares in an English company was insufficient to establish a strong link to the jurisdiction.^[47] The vast majority of the respondent’s assets were located in the foreign jurisdiction in which the parties and the arbitration were seated, making it the more appropriate forum.^[48] Similarly, in Petrochemical Logistics Ltd & Axel Krueger v. PSB Alpha AG & Konstantinos Ghertsos, the court rejected the applicant’s argument that a strong link to the jurisdiction could be established by what had been described as a ‘long term connection’ with the jurisdiction.^[49] The court was not persuaded that the fact the defendant was a British national who was neither resident nor domiciled in the jurisdiction justified the court’s jurisdiction to continue a freezing order in respect of a Swiss-seated arbitration. In the absence of any other countervailing factors to tip the balance in favour of the applicant, the court discharged the order.

In these sorts of cases, it seems that an applicant will need to show evidence of some other factor, such as international fraud, which may, owing to policy considerations, necessitate the court’s intervention.^[50] These types of cases are relatively rare, limiting the scope of the English court’s role in foreign-seated arbitrations.^[51]

International jurisdiction

The English court will only grant relief against a foreign person or entity not present within its territorial jurisdiction if there is a basis on which the court can take (inter­national) jurisdiction over it. The position under the English court’s Civil Procedure Rules (CPR) and accompanying Practice Directions can be summarised as follows:

• Practice Direction 62 (Arbitration), Paragraph 3.1 provides that a court may exercise its powers under CPR Rule 6.15 (which provides for alternative service) to permit service of an arbitration claim form within the jurisdiction at the address of a party’s solicitor or representative acting for that party in the arbitration. In other words, service out of the jurisdiction may not be necessary.
• Pre-award: Under CPR Rule 62.5(1)(b), a court may give permission for an arbitration claim form to be served out of the jurisdiction if it is ‘for an order under Section 44 of the 1996 Act’. This provision therefore covers service of an arbitration claim form seeking a pre-award freezing order against a party to the arbitration agreement.^[52]
• Post-award: If CPR Rule 62.18 has been relied on to serve an arbitration claim form seeking leave to enforce an award (or the enforcement order itself) out of the jurisdiction, the court also has jurisdiction to grant freezing relief against the award debtor. No separate jurisdictional gateway is necessary. Alternatively, under CPR Rule 62.5(1)(c), a court may give permission to serve an arbitration claim form out of the jurisdiction if the applicant ‘seeks some other remedy . . . affecting an arbitration (whether started or not), an arbitration agreement or an arbitration award’ and the ‘seat of the arbitration is or will be within the jurisdiction’.^[53] This provision encompasses a claim under Section 37 of the SCA^[54] and, therefore, is available in respect of an application for a post-award freezing order. However, it does not apply to respondents who are not parties to an arbitration agreement or arbitral proceedings (as to which, see further below).^[55]
• CPR Rule 6.36 and Practice Direction 6B: CPR 6.36 provides that a claimant can serve a claim form out of the jurisdiction with the permission of the court if any of the grounds set out in Practice Direction 6B 3.1 apply. In practice, an application made against a party to the arbitration would be made through CPR Part 62 but in the case of a non-party to the arbitration, CPR Part 6 will be relevant.^[56]

Prior to Brexit, in respect of parties who were domiciled in an EU Member State, the Brussels I regime may (also) have applied, which, depending on the applicable Article, introduced the requirement of a ‘real connecting link’ between the subject matter of the relief sought and the jurisdiction of the court. The application of Brussels I in this context depended on whether the application for injunctive relief was made pre-award or post-award and whether the ‘arbitration exception’ in the Brussels I regime was found to apply.^[57]

Following the expiry on 31 December 2020 of the implementation period arising from the Withdrawal Agreement entered into between the United Kingdom and the European Union, the Brussels I regime does not apply to proceedings commenced on or after 1 January 2021.^[58] If the United Kingdom accedes in due course to the Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (known as the Lugano Convention), this may affect the position regarding interim relief in respect of parties who are domiciled in an EU Member State but, currently, the post-Brexit position remains unclear. Therefore, an applicant for interim relief in aid of arbitration should refer to the court’s jurisdiction under CPR 62.

Freezing orders against non-parties

Freezing orders against non-parties to the substantive dispute (a ‘non cause of action defendant’, or NCAD for short) – commonly referred to as Chabra orders after the case of that name^[59] – will be available if a claimant can show that the assets held by an NCAD either in truth belong to the defendant or if there is some other means by which a claimant could enforce against those assets.^[60] Chabra orders are an increasingly common feature of commercial disputes.^[61] However, for reasons discussed below, there is a degree of uncertainty regarding the application of the Chabra jurisdiction in the context of international arbitration.

The starting point is that if the NCAD is English or either located or incorporated in England, Chabra relief is available. In Maksimov, the court granted a Chabra-style freezing order against English non-party companies in support of enforcement of an arbitral award granted in English-seated LCIA arbitration proceedings.^[62] The court found that the assets (shares in a Ukrainian company) held by the non-parties were actually the assets of the respondent to the arbitration.

If the NCAD is foreign and not present within the jurisdiction, matters are less straightforward. In Cruz City,^[63] an application by an award creditor to the English (supervisory) court for a WWFO against NCADs who were all incorporated outside England and who had no known assets, directors, officers or business within the jurisdiction, was dismissed on jurisdictional grounds. One of the reasons the court gave was that Section 44 of the 1996 Act does not apply post-award or to non-parties. This (obiter) reasoning was referred to and approved in DTEK Trading SA v. Morozov,^[64] in which the court held that it did not have the power to make an order under Section 44 against a non-party to an arbitration agreement and that, accordingly, the claimant could not obtain permission to serve proceedings outside the jurisdiction under CPR Rule 62.5(1)(b).

The reasoning in DTEK was also followed by Mrs Justice Moulder in Trans-Oil International SA v. Savoy Trading LP,^[65] which concerned an application (ex parte) to add an NCAD to a WWFO in aid of an arbitration. The court rejected the argument that the current authorities presented a lacuna in the law regarding the court’s support for arbitration. The court found that Mrs Justice Cockerill had considered the authorities in DTEK and determined that the wording of Section 44 of the 1996 Act was not intended to permit applications against non-parties to the arbitration agreement. The approach in Cruz City and DTEK was also followed, albeit with more reluctance, at first instance by Mr Justice Foxton in A and B v. C, D and E concerning an application for an order for the taking of evidence from a non-party based in England to aid an arbitration seated in New York.^[66] Since then, Foxton J’s decision has been overturned.

The Court of Appeal in A and B v. C, D and E declined to follow the reasoning in Cruz City and DTEK in relation to the application of Section 44 of the 1966 Act to an NCAD ‘witness’.^[67] In that limited context, the Court of Appeal of England and Wales (EWCA)held that the court did have jurisdiction under Section 44 to make an order for the taking of evidence by way of deposition from a non-party based in England to aid an arbitration seated in New York.^[68] Although the EWCA recognised that the question to be addressed concerned the ‘long-standing controversy, . . . as to whether orders under Section 44 can be made against non-parties to the arbitration’, it expressly confined its reasoning to the application of Section 44(2)(a), which grants powers for taking evidence of witnesses. The EWCA in that instance shied away from ruling that the entirety of Section 44, including Section 44(2)(e) relating to injunctions, applied to NACDs outside the jurisdiction, instead deciding to leave ‘the issue of whether Cruz City and DTEK were correctly decided . . . to another occasion’.^[69] Notwithstanding that qualification, this decision probably represents a significant step towards clarifying the jurisdiction of the court to grant Chabra relief against foreign NCADs.^[70]

Although the current state of the law remains that an applicant will face significant challenges in obtaining Chabra relief pre-award or post-award if the NCAD is outside the territorial jurisdiction of the English court, the EWCA’s decision in A and B v. C, D and E may signal a welcome change to this approach. We must wait to see whether the court will now adopt a similar approach in respect of injunctions under Section 44 as it has for witness evidence. In the meantime, commentators suggest that the current approach in Cruz City and DTEK has left a ‘black hole’ in the law of injunctions in support of arbitrations that, it is argued, was never intended in the drafting of the 1996 Act.^[71]

The position in other jurisdictions

Having focused on the English court’s jurisdiction to grant domestic and extraterritorial freezing relief, we turn briefly to analogous court powers in other common law and civil jurisdictions.

Common law jurisdictions

There is significant overlap between the approach of the English court in relation to the grant of freezing relief and that of certain common law offshore jurisdictions, such as the Isle of Man, Cyprus, the British Virgin Islands and the Cayman Islands, where judges show a readiness to follow, and in some cases extend, the English jurisprudence described above. That is not true of all common law jurisdictions, however.

In the United States, the availability of freezing orders is quite limited in both federal and state courts. Pursuant to a 1999 decision by the United States Supreme Court, in actions for money damages, federal courts lack the inherent power to enjoin a defendant from dissipating its assets in anticipation of a judgment for money damages.^[72] Instead of a single in personam remedy, and absent any statute specifically authorising a freezing order, litigants in federal court must pursue in rem attachment of particular assets. Adding to the complexity, there is no uniform federal procedure for prejudgment attachment. Instead, the Federal Rules of Civil Procedure incorporate the prejudgment remedies of the state where the court is located.^[73]

Although the 1999 Supreme Court decision limited only the power of federal courts, several state courts concluded that they also lacked inherent authority to freeze assets in cases involving money damages.^[74] In those states, a plaintiff’s only option is to pursue statutory prejudgment attachment remedies, which can be procedurally quite complex and limited in scope.^[75]

To streamline the process of securing assets in aid of a judgment or award, in 2012 the Uniform Law Commission (an organisation that provides states with model legislation to bring clarity and uniformity to state law) promulgated the Uniform Asset-Preservation Orders Act, which would provide a uniform process for in personam freezing orders. As of February 2021, no states had adopted the draft legislation. Accordingly, prejudgment freezing orders in the United States remain largely out of reach.

Civil law jurisdictions

Many civil law jurisdictions recognise that it is not incompatible with a tribunal’s powers for the domestic courts to provide interim and conservatory measures.^[76] However, these are rarely extraterritorial in nature and often granted against specified assets.

By way of example, if one looks to other key arbitration centres, such as France and Switzerland, there appears to be no means of obtaining in personam relief. In France, a party can apply to the French court for interim measures in the form of an attachment order (saisie conservatoire) to preserve assets pending judgment or a final award, but these are generally only ordered when the defendant’s assets are located in France (or one of its overseas collectives).^[77] Similarly, in Switzerland, interim relief is limited to applying for civil attachment orders only in respect of Swiss-seated arbitrations or if the assets are located in the jurisdiction.^[78] The Swiss courts do not generally offer interim measures with extra­territorial effect.

Conclusion

The English court’s willingness to grant freezing orders, including WWFOs, in support of the arbitral process is an important example of its supportive approach to arbitration and the enforcement of arbitral awards. The power to grant WWFOs in respect of both English and foreign-seated arbitrations is one that is not generally available to claimants in other jurisdictions, where such relief as is available will often confer rights against individual assets rather than the broader in personam relief available in England against parties (and sometimes non-parties) to the arbitral process. The English court recognises that if a party is ultimately unable to enforce an award because the respondent has taken steps to ‘asset strip’, then this would render arbitration pointless. Although the continuing, but recently revisited, lacuna in the law regarding the availability of WWFOs against (foreign) non-parties means the law is ripe (and potentially now poised) for further development, the WWFO is nevertheless a powerful tool available to a party in support of arbitral proceedings in England.

Notes