Freezing orders: shutting the door before the horse has bolted

A significant risk in commercial litigation is the ability to recover from the judgment debtor the amount of the judgment.

Complex litigation may take many months or years to reach a determination giving a prospective judgment debtor an opportunity to dissipate assets and so frustrate the judgment creditor’s ability to recover after judgment has been entered.

In certain circumstances, a freezing order can be sought to prevent that occurring.  

What is a freezing order?

A freezing order (otherwise known as a ‘Mareva injunction’ or ‘asset preservation order’) restrains a prospective judgment debtor from disposing of assets which may be available to satisfy a judgment debt.

Freezing orders are only granted if there is a risk a prospective judgment debtor will dispose of or diminish the value of its assets or otherwise remove assets from the jurisdiction to frustrate the court’s processes.

A freezing order is not intended to provide security for a judgment debt.¹

Justice Pritchard’s decision in Nedroc Pty Ltd v Welling² (Nedroc) provides a useful summary of the requirements which must be satisfied to obtain a freezing order under Order 52A Rule 5(4) of the Rules of the Supreme Court 1971 (WA).

Facts

The plaintiff in Nedroc was a small family-run company which alleged that the first defendant, a former employee, had breached her contract of employment and/or her fiduciary duties owed to the plaintiff as an employee of the plaintiff.³

The alleged breaches involved ‘inappropriate’ payments made from the plaintiff’s business to suppliers which did not match invoices issued by the suppliers (including in a very large proportion, payments to suppliers of office stationery),⁴ the first defendant’s receipt of gifts from the stationery suppliers (to whom the ‘inappropriate’ payments had been made),⁵ the inappropriate use of cash cheques paid to the plaintiff’s business and cashed by the first defendant,⁶ the misuse of the plaintiff’s fuel cards by the first defendant and people connected to her (including the second defendant),⁷ and an ‘inappropriate’ payment to a mortgage account held jointly by the defendants which funded the acquisition of a property in Muchea.⁸

Requirements

The Court may grant a freezing order if certain requirements are met.  They are:⁹

• that the applicant has a good arguable case;
•  that there is a danger the prospective judgment debt will be wholly or partially unsatisfied because the judgment debtor may abscond or because the assets of the prospective debtor may be disposed of, dealt with or diminished in value; and
• the ‘balance of convenience’ favours the grant of the freezing order.

The requirement to establish a good arguable case, for the purpose of applying for a freezing order, is a relatively modest one.¹⁰

A good arguable case has been described as one which ‘is more than barely capable of serious argument, and yet not necessarily one which the judge believes to have a better than 50% chance of success’,¹¹ and has a ‘reasonably arguable case on legal as well as factual matters’.¹²

Obtaining evidence that establishes there is a danger the prospective judgment debt will be wholly or partially unsatisfied because the judgment debtor may abscond or dissipate assets is often difficult.¹³  There is less of an onus in a case where dishonesty is involved.

Where dishonesty is involved, the interests of justice can support the grant of a freezing order to prevent the dissipation of assets in the hearing of the action even though the risk of dissipation is less probable than not.¹⁴

When to apply and how

An application for a freezing order should be brought at an early stage of proceedings (ie. soon after the issue of the writ), and usually on an ex parte basis).¹⁵

This is to avoid a prospective judgment debtor disposing of assets once they receive notice of the proceedings.  (The application in Nedroc was brought on notice to the defendants, which the Court noted was unusual).¹⁶

Generally at the early stages of proceedings there is limited evidence available to prove the elements required for the grant of a freezing order.  However, an applicant can invite the Court to draw inferences that a risk of dissipation exists based on evidence of the conduct of the other party.¹⁷

The outcome of the application in Nedroc

The plaintiff had obtained a forensic accounting report following a preliminary investigation and was able to establish that it had a good arguable case against the first defendant by virtue of evidence which showed the first defendant:¹⁸

1. was involved in making orders for office supplies in excess of what the company required and subsequently, received gifts from those office suppliers;
2. misused fuel cards in her capacity as an employee of the plaintiff, which she was not entitled to use; and
3. received payments as a result of cashing cheques in circumstances where she had no entitlement.

The plaintiff was also able to show there was a risk that assets may have been dissipated through evidence of dishonest conduct on the part of the first defendant which included:¹⁹

1. the inappropriate payments and misuse of funds over a lengthy period of time, being around two years and involving a significant amount of money;
2. an admission by the first defendant about the misuse of company fuel cards and receiving gifts; and
3. text messages between the first defendant, the second defendant and family members which revealed the first defendant knew what she was doing was wrong but, nevertheless, continued to engage in the inappropriate conduct.

The plaintiff also claimed that the second defendant was involved in dishonest conduct and produced evidence indicating that the second defendant:²⁰

1. used and benefited from the company fuel cards and knew his conduct was unauthorised; and
2. may have benefited from the first defendant’s ‘inappropriate’ payment to the defendants’ mortgage account.

The Court found that the totality of the evidence showed there was a risk that together, the defendants may have dissipated their assets, in which case any judgment made against them would be unsatisfied. Freezing orders were made.²¹

Lavan comment

Nedroc illustrates that although evidence to establish the risk of dissipation of assets, particularly at the commencement of an action, may be limited, if the circumstances of the case involve dishonesty, the Court will intervene and grant a freezing order.