A Bank's Guide to Freezing Orders
In this article we take a detailed look at freezing orders. Of most concern to lenders will be the obligations that fall on them – as bankers to the respondent which is the subject of the freezing order – when dealing with the respondent's assets, for example in relation to drawings under a loan facility and permitting payments out of a frozen account.
What is it?
A freezing order (or freezing injunction) is an injunction granted by the High Court to restrain one or more parties from disposing of, dealing with, or diminishing the value of, any of their assets, typically up to a certain monetary limit1. A freezing order may be made in respect of assets within England and Wales (known as a Domestic Freezing Order), or in respect of assets worldwide (known as a Worldwide Freezing Order ("WFO").
A freezing order does not provide any security over the assets frozen, nor does it give the applicant priority over the respondent's other creditors if the respondent becomes insolvent.
Requirements for Grant
Upon receiving an application for a freezing order, the court will exercise its discretion to grant a freezing order only where it considers it just and convenient to do so. The following conditions have to be established for a freezing order to be granted:
1. the applicant must have a cause of action, justiciable in England and Wales;
2. the applicant must have a good arguable case on the merits; and
3. there must be a real risk of the respondent's assets being dissipated.
Application for a Freezing order
Applications for freezing orders are made pursuant to Rule 25 of the Civil Procedure Rules of England and Wales, and are generally made to a High Court judge with supporting evidence contained in an affidavit. There is a standard form of order, which provides the starting point for any order sought. An application for a freezing order may be made with or without notice to respondents, but is more commonly made without notice and, if necessary, before a claim is issued.
Banks and Freezing orders
A freezing order may be notified to a third party (such as a bank who holds funds on behalf of a respondent) to prevent any attempt by the respondent to deal with an asset. Once notified of a freezing order, a bank is also required to comply with it or otherwise it will risk being penalised and/or in contempt of court.
If any bank has either 1) been given notice of a freezing order, or 2) been made a party to a freezing order itself, it should carry out the following:
1. examine the terms of the freezing order (the whole order needs to be read);
2. comply with the freezing order strictly in accordance with its terms; and
3. take reasonable steps to ensure that the terms of the freezing order will not be breached.
In terms of complying with freezing orders of which it has been notified, this includes a bank taking reasonable steps to locate any relevant assets.
The freezing order may set out certain assets which are subject to the order. This may include a list of property assets, interests in shares etc. However, just because an asset is not specifically mentioned in the order does not mean that the asset is outside the scope of the order. The standard form definition of assets includes:
"…all the Respondent's assets whether or not they are in their own name and whether they are solely or jointly owned and whether the Respondent is interested in them legally, beneficially or otherwise. For the purpose of this order the Respondent's assets include any asset which he has the power, directly or indirectly, to dispose of or deal with as if it were his own. The Respondent is to be regarded as having such power if a third party holds or controls the asset in accordance with his direct or indirect instructions."
Respondent drawing down under loan facilities
In the case of JSC BTA Bank v Ablyazov2, the Supreme Court considered three issues:
1. whether the respondent's right to draw down under the loan agreements was an "asset" within the meaning of the freezing order;
2. if so, whether the exercise of that right by directing the lenders to pay sums to third parties constituted "disposing of" or "dealing with" or "diminishing the value" of an "asset"; and
3. whether the proceeds of the loan agreements were "assets" within the meaning of the extended definition in paragraph 5 of the Freezing Order on the basis that the respondent had power "directly or indirectly to dispose of, or deal with [the proceeds] as if they were his own".
Notwithstanding previous legal authority that "borrowings" were not covered by the standard form, it was held that proceeds of any loan agreement were within the definition of "assets" in the standard form freezing injunction.
A bank must not therefore permit a customer affected by a freezing order to draw down under its facility unless such draw down is used for a purpose allowed by such order.
It follows that if a bank has a customer affected by a freezing order, it should not permit any payments out of any bank account of the customer unless the payment is expressly permitted by the order. (Note that where there is a limit on the value of assets frozen by the order and the bank holds assets in excess of that sum, it may allow dealings with the balance over and above the sum frozen by the order). Under the standard form 'Exceptions to the Order', the order may permit respondents to deal with assets by:
a) spending up to £X per week on 'ordinary living expenses';
b) spending a reasonable sum on legal advice and representation; or
c) dealing with or otherwise disposing of any assets in the ordinary and proper course of business.
If instructed by a respondent to dispose of an asset, a bank must be careful, as previous case law clarified that, to qualify as a disposal (or payment) in the "ordinary course of business" which will fall within the exception, a bank must ensure that a disposal is:
a) in the ordinary course of business, and
b) in the proper course of business3.
The above requirements are separate and cumulative, and whether a payment falls within the exception will thus depend on what business is carried on by the respondent in question, and how it is usually carried on. If a bank had been instructed to carry out a series of similar transactions before a freezing injunction was granted, this would point towards those types of transactions being in the "ordinary course of business". Whether a payment is made in the "proper course of business" will depend on the purpose of the payment. If a payment is made to discharge a pre-existing liability of the business incurred in good faith, then this would probably be within the proper course of business.
Protection for a bank/variation of the order
The standard order also provides that:
a) the order does not prevent any bank from exercising any right of set-off it may have in respect of any facility which it gave to the respondent before it was notified of the order; and
b) no bank need enquire as to the application or proposed application of any money withdrawn by the respondent if the withdrawal appears to be permitted by the order.
If a bank is adversely affected by the order, it can seek to vary it by agreement with the applicant's legal representatives. It may be that a court order is not required to vary the freezing order if the order permits the parties to agree a variation in writing. If the order does not provide for this, the bank can apply to the court to vary the order, but must first inform the Applicant's legal representatives and supply them with the substance of any evidence to be relied upon in support of the application. Providing it is acting reasonably, a bank is likely to recover from the applicant its costs of any such application to court.
Being subject to a freezing order will not usually constitute an event of default under a facility agreement unless caught by a repeating representation and warranty concerning litigation.
Consequences of breaching a freezing order
Any bank notified of a freezing order and who knowingly assists in or permits a breach of it is liable for contempt of court, punishable by a fine or imprisonment. …so it needs to get it right!
1 CPR 25.1(1)(f)
2 JSC BTA Bank v Ablyazov  UKSC 64
3 Emmott v Michael Wilson & Partners  EWCA Civ 1028