Freezing and Ancillary Injunctions in Cross-Border Litigation

Кostiаntyn Likarchuk, Dаnylo Volkovetskyi

Recent journalist investigations, including most recently the “Paradise Papers”, have reinforced the view that multi-layered and complicated corporate structures are an integral part of large Ukrainian businesses. Sophisticated parties go beyond standard corporate structuring, which is usually limited by considerations of tax efficiency and corporate governance. Legal instruments (e.g., various freezing and ancillary injunctions) available in a relevant jurisdiction become more important when it comes to business structuring. This is so because involvement of any of company’s business partners in a dispute may have implications for the other business partners. Such disputes may involve not only civil and criminal proceedings in jurisdictions with different legal backgrounds, but also arbitration or even parallel arbitration proceedings. Proper cooperation among foreign counsels and efficient coordination of their work are, therefore, the key to successful navigation through all the pitfalls of such multijurisdictional disputes.

It goes without saying that local lawyers should be engaged in each jurisdiction in order to deal with all proceedings properly. In this regard, a reasonable question arises as to the role of Ukrainian counsel in such projects.

For Ukrainian lawyers coordinating the cooperation of foreign lawyers, it is particularly important from the very outset of the dispute to “digest” the client’s story from the legal perspective and then relay this to the foreign lawyers in plain language. This process frequently involves a number of difficulties, including the absence of written arrangements, lack of core documents, local peculiarities, etc.

Another crucial task of a Ukrainian counsel at the initial stage is to develop a general strategy and to consider the exact jurisdictions, type of proceedings, and material documents. Numerous factors should be considered during this exercise, including the availability of assets, appropriate legal action in each relevant jurisdiction, etc. If at the initial stage the Ukrainian counsel is able to assess what type of proceedings and what jurisdictions are worth considering, this will save a great portion of the client’s costs and, most importantly, time. Certainly, the strategy will further be clarified and confirmed with local lawyers of each relevant jurisdiction.

At the preparatory stage, issues of appropriate interim measures should be analysed in detail. These include the timing, scope and availability of specific relief in a given jurisdiction, the prospects of its enforcement in other jurisdictions, etc.

Therefore, a Ukrainian counsel should be aware of the legal instruments available in different jurisdictions. This will assist in effective freezing of assets and obtaining ancillary injunctions that supplement the main freezing injunction where it appears to be insufficient. In this article, we will focus on the overview of the interim injunctions available in common law jurisdictions and which are frequently used in cross-border litigation involving Ukrainian businesses.

 

Court-appointed receiver

Appointment of a receiver by a court on an ex parte basis (without notice to the opposing party) is one of the most efficient ways to preserve a company’s assets.

The claimant seeking the receiver appointment has to demonstrate a good arguable case before the court, as was held by the Eastern Caribbean Supreme Court in First Montana Services LLC et al v. Best Concrete Corporation et al. [2008].

The court in that case summarised two situations where the receiver is typically appointed. The first covers cases where the receiver has to preserve and manage assets pending litigation to decide the rights to these assets. In these cases, the assets are at risk of being damaged or dissipated by an interested party. Therefore, a higher standard of proof applies: the claimant has to demonstrate that the assets would be in danger if left in possession of the person that controls them.

The second situation covers cases where the claimant already has rights to the assets, which is the case of a judgement creditor or a mortgagee where the principle amount is due. In these cases, the receiver has to preserve and manage the assets before their sale. This results in a lower standard of proof: a receiver is appointed where the court preliminarily observes that assets belong to the claimant. It is, therefore, unnecessary to prove the risk of dissipation with respect to the assets.

In practise, successful appointment of the receiver (who the claimant typically proposes) entails the effective and direct control of the claimant over the assets. Indeed, creditors are mainly interested in receiving funds rather than other property. Nonetheless, where the debtor does not own any funds, takeover of assets and further dealings with them (aimed at restoration of its financial standing and ultimate sale) is a satisfactory scenario for the creditors.

Our team has dealt with several cases where one of parties to a dispute was seeking appointment of the receiver. These involved different jurisdictions and opposite outcomes for the claimant. From our experience, the receiver appointment is not itself a clear-cut answer to all problems. Depending on the jurisdiction, the receiver has a different scope of powers and, most importantly, control over subsidiaries and material assets. The most favourable scenario for the claimant is where the receiver appointed upon the claimant’s proposition has the powers to participate in a general shareholders meeting — that is, he/she can “step into the shoes” of a shareholder. Otherwise, the receiver may not be always able to preserve the assets located in Ukraine from being damaged or dissipated. 

Apart from the high standard of proof required in such types of cases, the claimant should also make a full and frank disclosure. An improper disclosure may lead to a rejection of the application or a lifting of the court order appointing the receiver. This is because the party’s credibility is taken seriously in English-style litigation.

 

Unless orders

An “unless order” (also known as a Hadkinson order) is another effective remedy in cross-border litigation directed against a party obstructing trial and judgement enforcement. Principles underlying an “unless order” were first laid down in Hadkinson v Hadkinson [1952] P 285 (CA). An “unless order” is typically granted where one party repeatedly ignores court orders and the court, therefore, determines to cease that conduct. In particular, an unless order compels the defaulting party to perform certain procedural requirements by a set date and it specifies the consequences of a possible default.

The court determines the implications of the default on case-by-case basis. In Fairacres Ltd v Abdul Mohamed [2008] EWCA Civ 1637, the defendant failed to submit a list of documents in a proper format on three occasions. The court granted an unless order stating that unless the defendant serves the list of documents in a requested format by the fixed date, the defendant would be barred from defence and his counterclaim would be struck out. Another example is an “unless order” stating that unless a party files an expert report by a certain date, the party will not be allowed to rely on this evidence.

At the same time, courts typically take a cautious approach toward granting unless orders. This is based on the general reluctance of courts to decide a case on procedural grounds rather than on merits, as emphasised in the BVI case Gladys Scatlife v BVI Health Services Authority [2015] BVIHCV 2011/0087. For this reason, striking out a whole claim is possible where a party seriously and repeatedly neglects a court’s orders. Courts also need to consider less severe measures when deciding whether to strike out a claim.

In our most recent case involving BVI litigation, the local court granted an “unless order” stating that unless the defendant transfers certain assets to the receiver, it would be barred from seeking any form of relief from the court. Importantly, the defendant can challenge such orders, which, nevertheless, does not stay their execution.

From our experience, an “unless order” is frequently granted in conjunction with an asset handover order. The latter directs the defendant to procure the delivery and handover of specified assets (for instance, shares) within deadlines specified in the court order. In practice, these two orders follow the order for the receiver appointment since the court typically orders the assets to be transferred directly to the receiver.

 

Freezing injunctions

A common tool in cross-border litigation is a freezing injunction (also known as a Mareva injunction). The injunction prevents the defendant from dissipating or otherwise dealing with its assets. A freezing injunction secures the assets until enforcement of a court judgement. Courts can grant the order throughout the whole litigation: at pre-trial stage, during the trial, and post-judgement.

English courts exercise broad discretion as to the scope of assets covered by a freezing injunction. This includes assets situated within the United Kingdom and worldwide. A freezing injunction dealing with assets outside the United Kingdom is called a worldwide freezing order (WFO) and is further evidence of the “long arm” of the English judiciary.

Under the applicable legal test for a WFO, the claimant needs to demonstrate to the court that (a) it has a good arguable case, (b) there is a real risk of asset dissipation, and (c) the defendant has assets to be caught by the court order. The Court of Appeal recently confirmed this test in Ras al Khaimah Investment Authority and others v Bestfort Development LLP and others [2017] EWCA Civ 1014.

Importantly, a WFO does not act automatically and needs enforcement in the foreign jurisdiction where the defendant’s assets are located. At first glance, one can doubt the effectiveness of this “nuclear weapon” of commercial litigation considering the lengthy enforcement procedures. Nonetheless, English law provides a mechanism of penalties for those litigants who disobey court orders and a freezing order in particular: these persons are found “in contempt of court”. There are three types of penalties imposed, namely a fine, sequestration, and imprisonment.

Although there are no strict rules as to the severity of penalties to be imposed, English case law provides guidance in this area. In JSC BTA Bank v Ablyazov [2012] EWCA Civ 1551, the Court of Appeal ruled in favour of a 22-month imprisonment for misconduct, including non-disclosure of assets in breach of the WFO, false statements at cross-examination, and dissipation of assets in breach of the freezing injunction.

On the other hand, English law requires the claimant to prove contempt of court to a criminal standard that is beyond the standard of reasonable doubt as was held by the Court of Appeal in Phillips and another v Symes and another [2003] EWCA Civ 1769.
It follows that the claimant needs to show the intention of the defendant to disobey the court order. This makes penalties for contempt of court less attractive for the claimant.

Another advantage of a freezing injunction is that it can be directed against non-parties to proceedings. To this effect, the claimant needs to demonstrate that a non-party holds the assets on behalf of the defendant. This peculiarity renders a freezing injunction effective where the defendant conceals its assets though a web of shell companies or has put them into a trust.
The court jurisdiction to make orders toward non-parties is called Chabra jurisdiction and derives from the case TSB Private Bank International SA v Chabra [1992] 1 W.L.R. 231.

In that case, the court issued a freezing injunction against a company of which the defendant was a major shareholder. In doing so, the court held that there was a good arguable case that the defendant beneficially owned the company’s assets.

The claimant may not be required to show a good arguable case before the court if a freezing injunction is sought to facilitate the enforcement of the existing court judgement. This is because courts are more likely to grant injunctions in this case rather than before the judgement is made.

 

Disclosure orders and Norwich Pharmacal orders

Needless to say, information about a defendant’s assets is crucial and the claimant, therefore, needs a clear picture of these assets before initiating a dispute. Courts may grant a disclosure order at pre-trial stage, during the trial, and at the post-judgement stage. In general terms, a disclosure order directs the defendant to provide information and documents about its assets by a certain date and within a particular scope.

Another option for receiving sensitive information about a case is a Norwich Pharmacal order. This is a special disclosure order directed against a third party. It is typically used to identify a wrongdoer and the nature of wrongdoing, to trace assets, and to assist in the enforcement of a judgement. The order originates from the House of Lords case Norwich Pharmacal Co. & Others v Customs and Excise Commissioners [1974] AC 133.

The claimant may seek a Norwich Pharmacal order from a third party that is involved in wrongdoing, whether innocently or not. This extends, among others, to banks, registered agents, other corporate services providers, and entities that form parts of sophisticated corporate structures. Under a Norwich Pharmacal order, the defendant becomes obliged to make full and frank disclosure and to assist the claimant in obtaining information to the best of its ability.

A Norwich Pharmacal order extends to the full information about the wrongdoer and how he/she has managed the assets.
It can be sought where the contractual, and not only tort, wrongdoing took place. This order may be especially useful when the claimant lacks certain evidence which it believes to be in the possession of a third party (banks and corporate service providers, most frequently) and which can be crucial at the very beginning of cross-border litigation.

Furthermore, a Norwich Pharmacal order is usually issued together with a gagging order. This is an ancillary injunction by which a court prohibits a third party from informing anyone about the existence of a legal action, any other related case, and about the order itself.

 

Conclusions

Cross-border litigation offers litigants a set of diverse interim injunctions with different effects and consequences. To be able to use these instruments properly and, most importantly, in a timely manner, experienced litigation lawyers in Ukraine and in the relevant jurisdictions should be engaged from the outset of the dispute. It is also advisable at the stage of structuring a business to have litigation lawyers review the future corporate structure from the perspective of a potential dispute. While the opinion of litigation lawyers need not influence the corporate structure, such an exercise will provide at least a general understanding of the possible course of actions in a potential dispute.    

 

By Kostiantyn Likarchuk is a partner at Kinstellar,

Danylo Volkovetskyi is an associate at Kinstellar