FREEZING INJUNCTIONS: STAY OF DISCLOSURE ORDERS

Ian Geering QC and Matthew Parker, 3 Verulam Buildings.

In Motorola Credit Corporation v Uzan [2002] All ER (D) 223 (Jun), the Court of Appeal considered whether a party who was subject to a worldwide freezing injunction, initially made without notice, should be required to provide information about his assets before an inter partes hearing to determine whether the injunction should be continued.

The claimants had commenced proceedings in the United States.  They claimed that the defendants had induced them to lend substantial sums of money to a company, of which the defendants were shareholders, with the intention that those sums should never be repaid.  They also claimed that the defendants had diluted the value of certain shares pledged as security for the loan.  The claimants obtained a freezing order in the United States limited to the defendants’ assets in that jurisdiction, the US court having no jurisdiction to grant worldwide relief.

The judge in the US court held that the preliminary indication was that the defendants had ‘engaged in repeated acts of fraud and chicanery, and thereby perpetrated, and continue to perpetrate, a rather massive swindle.’  He ordered the defendants to deposit certain shares with the court by 20 May 2002, in order to restore the security which the claimants alleged had been diluted.

In light of the findings of the US court and the defendants’ failure to comply with its order, Motorola applied to the English court without notice for a worldwide freezing order against the defendants, pursuant to s 25 of the Civil Jurisdiction and Judgments Act 1982.  On 30 May 2002, the court granted the application and ordered the defendants to inform Motorola’s solicitors of all their assets worldwide and to swear an affidavit confirming that information.  The order also provided that the defendants could put up security of US$200m to be released from the injunction.  It was well established that the court had jurisdiction to make such an order, even though worldwide relief was not available in the United States: Crédit Suisse Fides Trust SA v Cuoghi [1997] 3 All ER 724.

The first and fourth defendants applied to discharge the freezing injunction and for a stay of the disclosure orders. They argued that there was a strong case to set aside the freezing injunction and that they should not in the meantime be required to disclose their assets.  They argued that unless a stay was granted, they would suffer irremediable prejudice by revealing information, while Motorola would not suffer any prejudice if a stay was granted.

The applications for a stay were rejected.  David Steel J held that it was prima facie inappropriate to allow the freezing order to stand (at least for the time being) but to put the mandatory requirements for disclosure on hold.  He was satisfied that Motorola might suffer serious prejudice if disclosure was not given so as to allow the freezing order to be policed effectively pending the inter partes hearing.  This was consistent with the decision of the Court of Appeal in Grupo Torras SA v Sheikh Fahad Mohammed Al-Sabah [1996] 1 Lloyd’s Rep 7.  In that case, Steyn LJ observed that the worldwide freezing order would be a ‘relatively toothless procedure’ if exceptional circumstances were required before a respondent was compelled to give disclosure pending an application to set it aside.  Grupo Torras was cited with approval by the Court of Appeal in S & T Bautrading v Bertil Nordling (5 July 1996, unreported).

On appeal, the defendants argued that the judge had misdirected himself in holding that there was no basis upon which compliance with a disclosure order could be suspended.  Waller LJ (with whom Lord Woolf CJ agreed) rejected that submission: the judge had appreciated that there might be circumstances in which such a suspension could be granted.  Furthermore, this was not a case in which the Court of Appeal should interfere with the exercise of the judge’s discretion: a freezing order cannot be effective without disclosure of assets; Motorola had a strong case that a fraud had been committed and that dissipation was a serious risk; the defendants had no good excuse for not complying with the order of the US court and they could have arranged for security to be given, but had offered none.  The appeal would be dismissed.

Sedley LJ (dissenting) stated that, on an application to vary the terms of an order made without notice, the burden should be upon the party seeking disclosure to satisfy the court that it was a proper case for disclosure, given the imminence of an arguable challenge to the entire freezing order.  It was not for the respondent to displace an order made in his absence.  David Steel J had erred in taking this approach.

It is clear from the three Court of Appeal decisions on this point that the court has a discretion to suspend the operation of a disclosure order pending an application to set aside a freezing injunction, but that the discretion will rarely be exercised. As Lord Woolf CJ confirmed, ‘Normally when making worldwide freezing orders it will be appropriate to make a disclosure order as well.’