Commercial Court rules that respondents to freezing order not entitled to use frozen funds for legal expenses

Preetha Gopalan

The Commercial Court has held in Tidewater Marine International Inc v Phoenixtide Offshore Nigeria Ltd and others that in certain exceptional circumstances, the court may depart from the established principle that a litigant who is subject to a freezing order is permitted to use its frozen assets to pay for legal expenses to defend a claim.  The court found that even in circumstances where a litigant has proven that there are no other sources of funds available to it, a consideration of the overall justice of the case may result in the litigant being prevented from using its frozen funds to defend itself.

The respondents in this case were subject to a worldwide freezing order which contained the usual provision permitting reasonable expenditure on legal advice and representation.  An order of a similar nature was obtained from the Swiss court over certain of the respondents’ Swiss bank accounts, but the Swiss order did not contain a carve out for legal expenses.  Accordingly, the respondents applied to the court seeking an order requiring the applicant to join in a request to the Swiss court for a variation of the Swiss order so that the frozen funds in the Swiss bank accounts could be used by the respondents to defend the claim against them.

The judgment helpfully summarises the legal principles applicable to the question of whether or not a defendant should be permitted to use its frozen assets to pay its legal expenses:

  • The starting point is that the issue only arises where a freezing order has been made against the defendant.  This means that the court has already concluded, even before the claim has been established, that justice requires that the defendant’s freedom to dispose of its own assets should be restrained.
  • However, a freezing order is not intended to provide a claimant with security for its claim, but only to prevent the dissipation of assets which may render any future judgment unenforceable.  Whilst the disposal of assets outside of the ordinary course of business is prohibited, payments in the ordinary course of business are permitted even if the consequence will be that the defendant’s assets are completely depleted before the claimant is able to obtain judgment.
  • A defendant is entitled to defend itself using frozen funds (which are after all its own money) so long as such expenditure is limited to a reasonable sum.
  • The ordinary rule that the defendant should have resort to frozen funds to finance its defence is subject to it being able to demonstrate that it has no other assets with which to fund the litigation.

Mr Justice Males then went on to note two particular points in respect of the established principles above:

  1. Even where the defendant has no other assets, its right to use the frozen funds is only “the ordinary rule”.  This right is therefore capable of being outweighed by other considerations – ultimately it is the interests of justice which must prevail.
  2. The burden is firmly on the defendant to demonstrate that there are no other assets available to it, apart from those subject to the freezing order, which it could use to fund its defence.

The court held that the overarching test should be an assessment of “the overall justice” of the case:

The principle that a defendant bears the burden of persuading the court that there are no other assets available to fund the litigation is one aspect of that assessment, but not the only aspect.  In most cases the absence of other assets will be decisive. Justice will require that such assets as there are should be available to fund the defendant’s defence.  But in what is likely to be an exceptional case, this is capable of being outweighed by other considerations”.

The present case was deemed to be exceptional in the light of the following:

  • The respondents had repeatedly provided false evidence to the court in order to frustrate the applicant’s attempts to obtain sums to which the court had held it was entitled.
  • The respondents had flagrantly flouted orders of the court and remained in contempt of court.
  • One of the respondents was a fugitive from justice, having avoided serving his prison sentence in England for contempt of court.
  • It was only because of the respondents’ contempt that the present action became necessary – had the respondents complied with the orders of the court, the applicant need not have brought this claim and none of the legal costs in this action would have been incurred by either party.

In the circumstances, the court found that a release of frozen funds to the respondents would have been “grotesquely unfair” when the matter was considered as a whole.  The court further held that it would have arrived at the same decision even if the respondents had adduced credible evidence that there were no other sources of funds available to defend the claim (which they had not) because that was “what the overall interests of justice would have required”.

Tidewater Marine International Inc v Phoenixtide Offshore Nigeria Ltd and others [2015] EWHC 2748 (Comm)

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