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Extraterritorial Freezing Orders
By Michael Douglas* and Nilan Ekanayake**
The freezing order is one of the law’s “nuclear weapons”, according to Donaldson LJ in Bank Mellat v Nikpour (1985) FSR 87 (CA) 92. It is an extraordinary discretionary remedy, which restrains a person from dealing with assets to prevent a person from removing or hiding their assets thus frustrating satisfaction of some future judgment. This article considers recent developments for freezing orders in cross-border litigation. In particular, it considers freezing orders issued in aid of foreign legal proceedings, and the High Court’s recent affirmation of the Federal Court’s power to issue worldwide freezing orders in Deputy Commissioner of Taxation v Huang [2021] HCA 43.
Freezing orders in Australia
Freezing orders—also known as Mareva orders (or, in the UK, Mareva injunctions)—are available in various superior courts, including in the Supreme Court of Western Australia and the Federal Court of Australia. Their availability in a particular circumstance depends on application of the relevant court’s rules. For example, r 7.32 of the Federal Court Rules 2011 (Cth) provides: (1) The Court may make an order (a freezing order), with or without notice to a respondent, for the purpose of preventing the frustration or inhibition of the Court’s process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied. (2) A freezing order may be an order restraining a respondent from removing any assets located in or outside Australia or from disposing of, dealing with, or diminishing the value of, those assets. Although a freezing order shares common features with a mandatory interlocutory injunction, in Australia, it is not understood as an “injunction” in the traditional sense of the word. As Kirby J explained in the leading case on these orders, Cardile v LED Builders Pty Ltd (1999) 198 CLR 380, “[n]ot every mandatory imperative order is an injunction”.1 Rather, a freezing order is a special kind of order, issued in a court’s inherent or implied jurisdiction.2 It is issued for a specific purpose: to prevent the frustration of legal process.3 Achieving that purpose comes at a cost to the respondent. A court will not interfere with a person’s liberty to deal with assets they own lightly. Freezing orders may even be issued against third parties, like banks.4 Further, failure to comply with a freezing order puts the person bound at risk of contempt of court. Indeed, in drafting a freezing order for issue in the Federal Court, an applicant needs to attach a penal notice, notifying the respondent that their non-compliance may result in “imprisonment, sequestration of property or other punishment”. (See the Federal Court’s Freezing Orders Practice Note (GPN-FRZG)). Accordingly, a court will consider various discretionary factors in ascertaining whether relief is warranted, including the following:
- Potential hardship to the defendant or prospective defendant;
- The rights of third parties who may be affected by the grant of the orders;
- Reputational damage to the defendant;
- Whether the party seeking the relief is a regulator;
- Whether the plaintiff’s undertaking as to damages is inadequate;
- The absence of any undertaking as to damages;
- Whether the plaintiff already has effective security for its claim; and Whether there has been a delay in the bringing of the application or a lack of candour in the materials placed before the court.5
Freezing orders in crossborder litigation
Modern litigation frequently involves people and assets in different jurisdictions. The principles concerning freezing orders have developed such that relief may be available in matters with foreign elements. It has long been recognised, for example, that English Courts may issue freezing orders that take effect with respect to assets outside of the jurisdiction.6 (Indeed, originally, freezing orders were available with respect to persons outside of the jurisdiction, and not against a defendant within the jurisdiction.)7 The effectiveness of an extraterritorial freezing order in a relevant foreign jurisdiction depends on recognition and enforcement of the order in that foreign jurisdiction. Where the person to be bound is located outside of the jurisdiction of the issuing court, the effectiveness of the order may be open to question. Australian courts may permit service on a respondent outside of the jurisdiction (eg, Federal Court Rules 2011 (Cth) r 7.37) but that does not mean that the respondent will comply. An extraterritorial order may also impeach “comity”: the deference that courts give to foreign jurisdictions and their institutions to deal with people and things in their territory. Comity favours a cautious approach to granting extraterritorial relief.8
Freezing orders might also be issued in aid of a foreign legal process. The High Court considered that prospect in PT Bayan Resources TBK v BCBC Singapore Pte Ltd (2015) 258 CLR 1.
The Supreme Court of Western Australia had issued a freezing order in aid of a pending proceeding in Singapore, pursuant to Rules of the Supreme Court 1971 (WA) O 52A r 5. The application in WA was made by the plaintiff to the foreign proceeding, which sought to freeze the foreign defendant’s shares in an Australian company. The order had the following effect:
The freezing order … prohibited, and continues to prohibit, Bayan until further order from: transferring any of its shares in KRL to a related entity; further encumbering those shares; or in any way disposing of, dealing with or otherwise diminishing the value of those shares without first giving notification in writing to BCBC and its
Australian solicitors… The bound respondent, Bayan, argued that the order was beyond the Supreme Court’s power. The High Court rejected that proposition. The freezing order was permissible in that any judgment resulting from the foreign proceeding would be registrable in Australia under the Foreign Judgments Act 1991 (Cth). The freezing order protected the prospective process of recognition and enforcement of the Singaporean judgment in Australia, and was therefore permissible.
Freezing orders in aid of a prospective foreign judgment: Broad Idea International Ltd v Convoy Collateral Ltd [2021] UKPC 24
In Broad Idea International Ltd v Convoy Collateral Ltd [2021] UKPC 24 (Broad Idea), the Privy Council considered, firstly, whether a court could serve a defendant outside the jurisdiction where a freezing order was the only relief sought; and secondly, whether the court has power to grant a freezing order in aid of a prospective or existing foreign judgment, where the court has jurisdiction over the respondent. These issues arose on appeal from a decision of the Court of Appeal of the Eastern Caribbean Supreme Court (British Virgin Islands) (EC Court of Appeal), which in turn considered a decision of the High Court of the British Virgin Islands (BVI). By majority, the Board answered “no” to the first issue, having regard to the applicable service rules of the BVI court10 in light of previous leading authority.11 As regards the second issue, the Board answered “yes”. Convoy Collateral had brought proceedings against Dr Cho Kwai Chee in Hong Kong, seeking damages and other substantive relief. Broad Idea was a company incorporated in the British Virgin Islands (BVI) and Dr Cho owned 50.1% of its shares.
Convoy Collateral also brought proceedings in the BVI against Broad Idea, seeking freezing orders (in the UK referred to as “freezing injunctions”) to prevent dissipation of Broad Idea’s assets which may have served to defeat Convoy Collateral’s ability to enforce any judgment it may obtain against Dr Cho in Hong Kong. The following was indisputable: there was undoubted personal jurisdiction over Broad Idea (being incorporated in the BVI); no substantive proceedings were brought against Broad Idea in the
BVI; an attempt was made in the BVI proceeding to obtain a freezing order in support of a claim pursued in a foreign court; ie, in Hong Kong. The Privy Council effectively had to decide between two competing lines of authority as to whether freezing orders were available to Convoy Collateral in the particular circumstances. The first stemmed from a decision of the House of Lords in 1979 – Siskina (Owners of cargo lately laden on board) v Distos Cia Naviera SA (“The Siskina”) [1979] AC 210. In The Siskina, the House of Lords concluded that the Court had no power to grant an interlocutory injunction unless it would be ancillary to a cause of action for final, substantive relief that the court would have jurisdiction to grant. In comparison, the court in Black Swan Investment ISA v Harvest View Ltd (BVIHCV 2009/399) concluded that granting a freezing order against a BVI company controlled by an individual against whom substantive proceedings were brought in South Africa was an appropriate exercise of the court’s power to protect the claimant’s ability to enforce a money judgment obtained in South Africa.
The EC Court of Appeal confirmed the conclusion in Black Swan in Yukos CIS Investments Ltd v Yukos Hydrocarbons Investments Ltd (HCVAP 2010/028). Before Broad Idea reached the Privy Council, the EC Court of Appeal reconsidered its decision in Yukos and concluded that the decision was wrongly decided: it was bound by the line of authorities starting with The Siskina. That is, the EC Court of Appeal held that a freezing order is not available unless the freezing order would be ancillary to a cause of action justiciable in the issuing court.
The Privy Council reached a different conclusion. By a slim majority of 4:3, it concluded that the decision in The Siskina should be overturned, at least as regards the second issue described above. As Lord Leggatt (with whom Lords Briggs, Sales and Hamblen agreed) summarised, the ability of BVI12 courts to grant a freezing order against a party to assist enforcement of a prospective or extant foreign judgment represents the current law of the BVI.13 The majority thus affirmed the availability of a “freestanding” freezing order in aid of foreign proceedings. Lord Leggatt went on to say that a court with equitable or statutory jurisdiction to grant injunctions has power to grant a freezing order against a party over whom the court has personal jurisdiction, provided that: 14 the applicant has already been granted or has a good arguable case for being granted a judgment or order for the payment of a sum of money that is or will be enforceable through the process of the court; the respondent holds assets (or, as discussed below, is liable to take steps other than in the ordinary course of business which will reduce the value of assets) against which such a judgment could be enforced; and there is a real risk that, unless the injunction is granted, the respondent will deal with such assets other than in the ordinary course of business with the result that the availability or value of the assets is impaired and the judgment is left unsatisfied. Finally, Lord Leggatt concluded that, while there may be discretionary factors relevant to the exercise of the court’s discretion, courts will not be denied jurisdiction to grant the remedy on the basis of: 15
the judgment being a judgment of a foreign court, if it is capable of enforcement within jurisdiction; the judgment not being a judgment against the respondent; and the proceedings not yet having been commenced; it is enough that the court be satisfied with a sufficient degree of certainty that a right to bring proceedings will arise and that proceedings will be brought.
Comment on Broad Idea
Before turning the High Court’s decision in Deputy Commissioner of Taxation v Huang [2021] HCA 43 (Huang), it is worth noting a few matters of principle relevant to the Australian legal landscape prior to Huang. First, whilst the judgment in Broad Idea is a sensible, pragmatic legal development, its transposition to an Australian court had the potential to be thwarted by recent High Court judgments. For example, decisions such as Glencore International AG v Commissioner of Taxation (2019) 265 CLR 646 and Smethurst v Commissioner of Police (2020) 94 ALJR 502 have emphasised the need to show an actionable legal right, or a sufficient equity to give rise to an obligation of conscience, in order to obtain injunctive relief in equity’s auxiliary or exclusive jurisdictions. English courts consider freezing orders as a type of “injunction”, whereas since Cardile, Australian courts consider them to be a different kind of “order”.
Secondly, the transplant of Broad Idea into Australian doctrine also had the potential to be thwarted by the text of rules of superior courts which focus on protection of the domestic court’s own legal process. Alternatively, it could have been argued that every prospective foreign judgment following a foreign proceeding could be recognised or enforced in Australia at general law, even if the foreign judgment were not registrable under statute.16 Accordingly, any foreign proceeding could crystallise into a proceeding in the domestic jurisdiction, which may be protected by an order issued in light of the text of the rules and the authority of PT Bayan. If that is not right, it would nonetheless be possible for an Australian court to follow the Privy Council by drawing on the deep well of inherent and implied powers of Australia’s superior courts. As litigation evolves with globalisation, so too should the exercise of powers of Australian courts in order to achieve material justice for parties to global disputes.
The worldwide freezing order in Deputy Commissioner of Taxation v Huang [2021] HCA 43
In December 2021 the High Court delivered judgment on a case that considered the effect of r 7.32 of the Federal Court Rules extracted above. Could the Federal Court issue a freezing order that affected the worldwide assets of the respondent, even though there was no realistic possibility the relevant Australian judgment would be recognised or enforced in the foreign jurisdictions in which the respondent’s assets were located?
Mr Huang had lived in Australia for some years. In 2018, he absconded to China when audited by the ATO. It was later found that he had significantly understated his income, and thus owed the government a significant tax debt of over $140 million.17 Before the Federal Court delivered judgment to that effect, in September 2019 the Court issued an ex parte interim worldwide freezing order, substantially in the terms of Annexure A to the Federal Court’s Freezing Orders Practice Note (GPN-FRZG).18 At that time, Katzmann J found that there was a danger that a prospective judgment against Mr Huang would be partly or wholly unsatisfied by Huang moving or diminishing his assets. After summary judgment was ordered against Huang with respect to his tax debt,19 the worldwide freezing order was continued in inter parte proceedings in which Huang had submitted to the Federal Court’s jurisdiction.20 This was the case even though Huang had assets in Hong Kong and China, and it was unlikely that the judgment for a tax debt would be enforceable against Huang in Hong Kong or China—jurisdictions in which Huang had assets that were purportedly “frozen”. In the Full Court, Besanko, Thawley and Stewart JJ allowed Huang’s appeal, holding that in order to extend a freezing order extra-territorially, there must be a realistic possibility that any judgment obtained by an applicant could be enforced against assets of the respondent in the place to which the proposed order relates.21 A High Court majority overturned the Full Court’s judgment. Gageler, Keane, Gordon and Gleeson JJ found in favour of the Deputy Commissioner after construing the Federal Court Rules, and considering the policy implications of the contrary position:
[T]he Full Court’s requirement is inconsistent with the evident purpose of r 7.32, restricting the power in a manner that would significantly impair its capacity to protect the Federal Court’s process, including by granting urgent relief. Such a requirement would render the power largely impotent to protect the Court’s process from frustration by defendants who are able to secrete their assets or move them almost instantaneously across international borders. Unaffected by a Worldwide Freezing Order, a defendant would be free to move assets surreptitiously to a jurisdiction not covered by the order... 22
In dissent, Edelman J recognised the commerciality of the majority position but held that the Court’s power to issue a freezing order has territorial limitations.23 His Honour noted that freezing orders were, by their nature, draconian tools and should not be used without good reason.24 His Honour also stressed that courts cannot be taken to act in vain, implying that the global scope of the freezing order in this case would be a mere brutum fulmen. 25
Conclusion
Global freezing orders may be severe in their consequences, and there is some force to Edelman J’s dissent. However, so too are the consequences of allowing international actors to exploit their foreign networks, and the jurisdictional veils between legal systems, to the detriment of Australian judgment creditors. Recent case developments concerning extraterritorial freezing orders demonstrate their considerable value to cross-border commercial litigation. The dissents in both Broad Idea and Huang serve to illustrate the jurisdictional difficulties inherent in dealing with orders having extraterritorial effect. Jurisdictional issues aside, there is also a live question as to how courts can (and should) exercise their discretion in circumstances where there is no realistic possibility of enforcing a judgment in the foreign jurisdiction.26 Despite the observed difficulties, the majorities of both the Privy Council and High Court have chosen to adopt a pragmatic approach to the development of legal jurisprudence consistent with the ever-evolving global village in which we live.
For EndNotes Please see the desktop version
