August 2021

BG: Going Nuclear with the Freezing Injunction – Your 6 Step War Plan for Dishonest Debtors

There are a few tools available to a creditor more devastating than the nuclear option of obtaining a freezing injunction against a debtor. A freezing injunction when deployed under the right circumstances can have all the effects of an atomic bomb – dropped on an unsuspecting debtor, the injunction can cripple a debtor’s business preventing it from dealing with its assets or bank accounts. The shock and awe delivered with the freezing injunction can result in a swift capitulation of a dishonest debtor. But a successful outcome requires planning and executing the freezing injunction like a military operation and like every military operation, a war plan needs to be drawn up.

1. Understand Your Weapon

A freezing injunction does not attach to the assets themselves but is an order that takes effect against the debtor personally and third parties who hold assets on behalf of the debtor e.g., banks. The injunction does not give proprietary rights over the assets – if the intent is to take control of assets, then rights of receivership or even judicial management should be considered. Obtaining the injunction does not guarantee recovery for the creditor as it does not provide any priority over other creditors.

A freezing injunction produces not just practical sanctions for a debtor in dealing with its assets but also legal sanctions which serves to maximize the overall impact.  The injunction typically contains not just a prohibition against dissipating assets not in the ordinary course of business but also a mandatory obligation to provide disclosure of the debtor’s assets. For a recalcitrant debtor, the consequence of failing to do either, could result in contempt proceedings.

The key test to obtain a freezing injunction is to demonstrate a risk of dissipation of assets. This is often difficult to prove with direct evidence but creditors often point to a debtor’s dishonest conduct – in a trade finance lending structure this could happen when accounts are manipulated, assigned receivables are diverted out of the lending structure or documents such as assignments forged to give the appearance of receivables due.

2. Gather Intel.

Understanding the asset position is crucial in putting together the freezing order itself but also in terms of how and where the injunction is deployed. This requires a deep analysis into the valuation of assets (particularly tricky for shares), the location of assets (critical if located overseas), and whether the control or operation of the assets are in the hands of third parties (e.g., bank accounts or machinery operated by third parties). Where assets are held by a third party as a nominee for the debtor (such as shares), then third party orders against that nominee can be considered to extend the effectiveness of the order.

3. Other Approaches to the Conflict

Once the necessary intel has been obtained, a decisive position has to be taken bearing in mind that not every conflict requires or warrants a bomb. Where liabilities far exceed assets, liquidation might be a more sensible option. Where on the other hand, the company has assets, but the directors are suspect, then judicial management might be a less expensive option to seize control of the debtor. Both these options however are measures of last resort as they entail the debtor being answerable to all creditors and lack the impact of a frontal assault of a claim against the debtor that benefits just one creditor.

4. Assess Other Hostiles

In its focus to pursue the debtor, a creditor may overlook a key factor in its strategy and that relates to the position in respect of other creditors. Going nuclear on a debtor loses its effectiveness if there are much larger creditors seeking to take legal action imminently. This is because a freezer does not give a creditor priority – it simply preserves assets until such time that a creditor obtains a judgment. This means that the costs and effort of freezing assets will practically be for the benefit of all creditors, but it is the creditor who obtains judgment quickest that gets to monetize the assets. A key consideration will thus be how quick a judgment can be obtained, bearing in mind that if any other creditor fires off liquidation in the meantime, the value of a successful judgment will be somewhat nullified.

Even where an injunction is obtained, it does not “freeze” all assets absolutely because the debtor is not prevented from making payments in its ordinary course of business. This could mean that a debtor could still pay another creditor its dues notwithstanding the petitioning creditor’s expense in obtaining the freezing injunction. So, knowing the debtor is key but knowing what the position of other creditors is vital.

5. Foreign Support Needed

Freezing injunctions typically involve multi-jurisdictional issues because the debtor may be located or has its assets in foreign jurisdictions. The entire force of the freezing injunction lies in the effectiveness of its ability to freeze the debtor’s assets, and this may be somewhat limited if there are no local sanctions to enforce a UK or Singapore freezing injunction. While some jurisdictions might recognise a foreign court order, many still require fresh proceedings from local courts, which may take time and negate the element of surprise on a debtor likely to move assets. Understanding the extent of foreign support needed is critical to ensure the freezing inunction dropped on foreign soil, is not a duGoing d.

6. Timing, Manpower & Resources

Like all injunctions, moving quickly is both a practical and legal requirement. What is often underappreciated, is the timing and resources needed. While it is hoped the use of a nuclear weapon brings a swift end to the conflict, a creditor must be prepared to deploy the necessary manpower and resources – the injunction once granted ex-parte needs to be defended against the debtor during the return date and preserved until judgment is obtained. Apart from the significant upfront resources in mapping out the strategy and executing the freezing order, a creditor must be prepared for an opponent that seeks to drag out the battle and engage in guerrilla tactics – by avoiding service of the documents and challenging procedural requirements including the duty to give full and frank disclosure.

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