Five questions lawyers and clients must answer when considering freezing orders

by Sol Dolor06 Jun 2018

Freezing orders are not rampantly used in New Zealand. And that’s exactly as it should be, says Brent O’Callahan, a director at K3 Legal.

“They are the exception not the rule,” he says. “They shouldn’t be the rule, because they are highly invasive and ought to be granted only where they are truly needed and where the court can be properly satisfied that the need for protection arises.”

In this discussion, the seasoned advocate breaks down freezing orders, how they can be effectively used even when defendants and assets are overseas, the risks linked to applying for them, the common mistakes lawyers commit when obtaining them, and five simple questions that streamline the decision-making process when considering freezing orders.

What are freezing orders?

Freezing orders are court orders that prevent someone from dealing with their assets in ways that would prejudice the ability of claimants to ultimately enforce judgments, O’Callahan says.

A claimant seeking a freezing order must satisfy the court that a good, arguable case is present. The claimant must also show that there is a substantial risk that the other party’s assets will be dissipated. This means that the assets could either be removed from a jurisdiction, or dealt with in a way that would ultimately affect the ability of a claimant to execute a judgment.

“They are possibly more common where the defendant is a person who has obtained money through some kind of fraud. This is because people who do that tend to embark on a plan to ensure that whatever assets they have are difficult to track down. They typically will use international transfers to move money offshore, move money into trusts and to friends or associates, or purchase various types of assets that are easily hidden, such as commodities or gold or financial instruments that have value to the bearer,” he says.

“There are different techniques that are used. These aren’t just the purview of fraudsters, but for people who have committed a fraud, the court regards them as unlikely to preserve the assets to satisfy the claimant’s claim,” he says.

Rare but effective

Not many cases necessitate the use of freezing orders. However, in cases where their use is apt, there may be no alternatives.

“If you’re trying to protect assets from being dissipated, then there are no real alternatives to a freezing order,” O’Callahan says. “There are other orders that are perhaps even more invasive that a court can make to protect specific assets that are the subject to a claim ­– and those are known as preservation orders – but if there is a concern that assets will be dissipated prior to judgment, then other than getting agreement from the party, which is unlikely, there are no real alternatives.”

In a recent case, K3 Legal saw just how effective freezing orders can be even for matters where defendants and assets are overseas.

“What we experienced, in terms of the freezing orders obtained, was a reasonable response by overseas institutions that held assets that were subject to the order. However, where those parties were overseas, there was a reluctance for those parties to continue compliance until there were some orders made in the courts of their own jurisdiction,” he says. “We have had some reasonable responses from the courts in those overseas jurisdictions, which meant that the orders we obtained became very effective. That was pleasing to see.”

He says that when a court hands down a freezing order, it can also make certain orders called ancillary orders, which are designed to support the freezing order. These ancillary orders usually take the form of some kind of disclosure.

“In this case, the defendant party was ordered to disclose the whereabouts of all his assets. He did not comply with that and that’s a fairly typical response in these situations,” he says. “However, the order was also directed toward various financial institutions that were known to or suspected of holding assets that were in his name or in the name of related parties. Those financial institutions have eventually, for the most part, complied with the orders of the New Zealand court to give disclosure of those assets, such as transaction details on bank accounts and the contents of a secure vault.”

Overseas enforcement of freezing orders

New Zealand courts see anyone who is affected by a freezing order as bound by the order, O’Callahan says. They may be the defendant themselves, or someone else that holds their assets, such as banks or other financial institutions.

If the affected party is within the bounds of the country’s territorial jurisdiction, the court can exercise control over them with the complete array of remedies and coercive powers available to the court.

“If they disobey, that is contempt of court. For example, an individual who disobeys an order of court and who is in contempt can, in appropriate circumstances, be arrested and placed in custody until they have purged their contempt,” he says.

The situation is complicated if that party has no connection to New Zealand. Then a direct way of enforcing a freezing order may not be present. That doesn’t mean, however, that a freezing order cannot be enforced in situations like this.

Defendants with assets in New Zealand, even if they are not present in New Zealand, can have those assets taken control of by the court pending compliance with the terms of the order.

“For example, in the most recent case, there was a question over whether an overseas banking corporation would comply with the orders made in New Zealand. It was suggested that because that banking corporation had significant assets in New Zealand, the court might be able to exercise control over those assets to coerce the overseas banking corporation to comply with the New Zealand orders if that became necessary. In that case, it did not become necessary,” he says.

And even when there are no assets in New Zealand that are connected to the defendant or to organisations believed to hold assets of the defendant, freezing orders can still be enforced.

“If direct enforcement or coercive power is not available to the New Zealand court, the claimants must rely on principles of comity amongst nations for courts of other jurisdictions to recognise the New Zealand orders in one way or another and to give effect to them through the processes available to the courts of those foreign jurisdictions,” O’Callahan says.

Common mistakes and associated risks

The rarity of the use of a freezing order means not many lawyers and clients have extensive experience with this specialised legal instrument. This may lead to mistakes and to overlooking associated risks.

“The most common mistake is to apply for them when it’s not appropriate to do so. Another mistake is not giving thought to different ways in which one can expect parties or other persons to respond,” O’Callahan says.

“The orders need to be tailored to a particular situation to anticipate the kind of responses that are typically given, which might include elements of misunderstanding from parties who receive the orders. These things need to be anticipated and the orders need to be framed, applied for, and supported in such a way that minimises those possibilities and gives the greatest effectiveness to what is sought,” he says.

One very important part of deciding whether to apply for a freezing order is considering a major risk inherent in being granted the order.

“When a claimant applies for it and it is granted, the claimant is required to give an undertaking to meet any damages or costs that are incurred should the order be shown to have been improperly obtained and also to meet the costs of any third parties who have to comply with the order or take steps in relation to it. The court has power to enforce that undertaking,” he says.

“Therefore, a client needs to understand that there are these risks and potential costs. A plaintiff needs to be able to meet those should he or she have to. The client needs to understand that this can become a burden because if transactions are interfered with by these orders and it’s shown later that this ought not to have occurred, then the plaintiff could be of responsibility for that,” he says. “It’s why it’s also important not to draft orders that are not entirely necessary or that go wider than they properly ought to.”

Also, when a freezing order is granted, the client and the legal team have to respond quickly and decisively as matters arise. “You can’t just get these orders and sit back,” says O’Callahan. “You have to be onto it with very short response times to manage them with parties and the court”.

This is why he stresses that clients, and even lesser-versed lawyers, seek advice from experts who have more experience when it comes to freezing orders. Another consideration is to answer five simple questions.

“Do I need it? Am entitled to it? What is the least invasive course I can to take? What do I do to make this effective? Can I suffer the ongoing burden of having obtained them?” he says. “Keep those in mind and once you do, you’ll do well.”

 

Brent O’Callahan

 

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