|July 29, 2013|
Previously published on July 2013
The standard form of freezing order contains a serious flaw which can enable a defendant to reduce its effectiveness to a troubling extent.
In JSC BTA Bank v Ablaysov  EWCA Civ 928 the Court of Appeal held that the standard form prohibition of "disposing of" or "dealing with" an "asset" did not prevent the defendant from drawing down on a loan facility by arranging for the lender to make the payment drawn down to a third party. In this case, the defendant had made a number of loan agreements after the freezing order was made against him and then used those facilities to pay legal and other expenses.
The payments were directly by the lender. Had the funds been drawn down into the defendant’s own account, the payments would have breached the order, but as they were made direct the Court of Appeal held that they fell outside the terms of the freezing order.
The standard freezing order prohibits a defendant, amongst other things, "disposing of ... or dealing with ... assets". The English courts have struggled in the past with the difficulty that drawing down on a loan creates a liability rather than disposes of an asset. In this appeal, the claimant argued that the rights under the loan agreement were a "chose in action”, that is a right to enforce a contractual or other right by legal proceedings. Such rights have value and are treated as assets for a number of purposes. This point had not been argued in the earlier cases.
The Court of Appeal decided that the choses in action represented by the defendant's rights under the facility agreements were not "assets" for the purposes of the order: although they had value, it was difficult to ascertain and the defendant's rights would not be amenable to execution by the claimant because they were subject to the lender's consent and possible cancellation. These factors combined with the importance of taking a strict approach to the construction of the order led the Court of Appeal to its conclusion that the standard order did not prohibit the drawdowns which had occurred.
This will be a concern to any claimant who has the benefit of a standard freezing order. The Court of Appeal recognised that this provides a route by which a defendant can reduce the benefit of the freezing order.
A freezing order does not provide security over a defendant's assets and so such lenders will rank equally with the claimant in the defendant's insolvency. Moreover, it is possible that such lenders will be able to pursue their claims to judgment more quickly than the claimant and enforce their claims against the frozen assets long before the claimant has its judgment and is able to enforce.
Whilst the defendant in this case might be viewed as being in a relatively unusual (indeed, the claimant suggested that it was a suspiciously unusual) position of being able to arrange borrowing facilities whilst subject to a freezing order, the Court of Appeal specifically recognised that the wider implications of its decision would include exempting payments made by credit or charge card from the prohibition contained in the standard freezing order.