Jasbir Dhillon QC: Freezing injunctions and receivership in support of arbitration

A frequently encountered problem for any claimant in international arbitration arises where the respondent seeks to make enforcement of any arbitral award against their assets difficult or impossible. In this article, I describe two forms of injunction available from the English court that provide an effective remedy for this widespread problem.

Freezing injunctions

A freezing injunction prevents a party from dealing with or disposing of its assets (located in England or worldwide) up to a specified amount until an arbitral claim has been determined or an arbitral award can be enforced. The jurisdiction of the English court to grant a freezing injunction in support of arbitral proceedings is derived from the Arbitration Act 1996, s44 or, in the case of a freezing injunction in support of an arbitral award, the Senior Courts Act 1981, s37(1).

That power is not limited to arbitrations where the seat is in England, but where the arbitration has a foreign seat the court may refuse to exercise its powers if it is inappropriate to do so: Arbitration Act, s2(3). The natural court to grant interim relief is the court of the country of the seat of the arbitration, especially where the curial law of the arbitration is that of the same country: Econet Wireless Ltd v Vee Networks [2006], at [19]. But where the seat of the arbitration is in England it will ordinarily be appropriate for the English court to issue orders in support of the arbitration: U&M Mining Zambia Ltd v Konkola Copper Mines plc [2014], at [54], [62]. The fact that the respondent to an English arbitration has no assets in England does not preclude the grant of such an order: Ibid at [63].

In order to obtain a freezing order an applicant must demonstrate: (1) it has a ‘good arguable case’ in support of its claim against the respondent; (2) assets of the respondent exist and that there is a risk that those assets might be dissipated; and (3) it is ‘just and convenient’ in all the circumstances for the court to exercise its discretion to grant the order.

Speculative freezing orders are ill-advised because the price of failure may well be the payment of substantial damages by the applicant to the respondent.

Freezing injunctions are, in principle, available against third parties who are not parties to the underlying arbitration. This type of injunction was first recognised in TSB Private Bank International SA v Chabra [1982]. It is available where there is a good arguable case that assets legally owned by a third party were in fact beneficially owned by the respondent. The Chabra order prevents the third party from disposing of the assets pending a final decision in the underlying arbitration and a final determination that the assets were in fact beneficially owned by the respondent: Cruz City 1 Mauritius Holdings v Unitech Ltd [2015].

Freezing orders may be sought without providing notice to the respondent if notice may lead the respondent to dissipate the assets rendering any injunction nugatory. The price that the applicant must pay for this procedural advantage is the onerous duty of full and frank disclosure to the court of all material matters against the grant of relief that the defendant might have relied upon. An applicant for a freezing injunction will be required to give to the court a cross undertaking to pay damages for any loss that the respondent suffers by reason of the freezing order if it turns out to have been wrongly granted; that cross undertaking may be required to be secured if the applicant does not have assets within the jurisdiction. As a result, speculative freezing orders are ill-advised because the price of failure to retain the injunction may well be the payment of substantial damages by the applicant to the respondent under the cross undertaking.

Therefore, any freezing order application must be prepared with meticulous care to ensure that it is successful on the without notice application and does not unravel when the respondent challenges it.

Receivership

A less well known, but potentially effective, remedy that the English court may grant to an applicant seeking to enforce an arbitral award is the appointment of a receiver by way of equitable execution over assets of a respondent, under the Senior Courts Act 1981, s37. A receivership order operates in personam over the respondent, having effect as an injunction restraining the arbitral award debtor from receiving any part of the property which it covers: Cruz City v Unitech [2015], at [35]. One of the powers of a receiver is the ability to exercise the rights of a shareholder and that may be a powerful tool where the respondent is a shareholder in entities that have substantial assets.

In order to grant a receivership order the court must have personal jurisdiction over the respondent. But there is no rule preventing the court from making a receivership order in relation to foreign assets, even if the English court’s order may not be recognised by the foreign court where the assets are located: Ibid at [35]-[36].

There needs to be sufficient connection with the English jurisdiction to justify making an order and to satisfy the requirements of comity: Ibid at [35]. The fact that an order is made with a view to the enforcement of an English arbitral award will provide jurisdiction over the defendant and sufficient connection with England: Ibid.

A receivership order generally requires the existence of an arbitral award that has not been enforced and evidence that there is some difficulty in using the normal processes of enforcement (eg the respondent’s assets are held through chains of companies located in jurisdictions which are not transparent as to the assets held): Cruz City, supra, at [47]. Also, a receivership order requires the identification of some property of the respondent that can be reached by the receiver because the court will not act if the appointment would be fruitless: Ibid at [47]. The English court is likely to be sympathetic to making a receivership order where it would support an existing freezing order and the respondent has shown that it was willing to disobey orders of the court.

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