THE LIVING AND LEGAL EXPENSES EXCEPTIONS
Authored by: Andrew Ayres KC (Barrister) - Twenty Essex & Andrew Barns-Graham (Barrister) - 3 Hare Court
This year marks the golden anniversary of Lord Denning’s seminal decision on freezing injunctions in Mareva Compania Naviera SA v International Bulkcarriers SA [1980] 1 All ER 213. (The case was reported in 1980, but the hearing took place on 23 June 1975.) To mark the occasion, Andrew Ayres KC of Twenty Essex and Andrew Barns-Graham of 3 Hare Court have published this series of articles, in which they explore the boundaries of freezing injunctions and provide their tactical and drafting recommendations. This is the fifth article in the series.
Introduction
Freezing injunctions are not final orders and they are not meant to punish defendants. They are instead designed to protect assets from illegitimate dissipation pending trial or enforcement after trial.
Freezing injunctions therefore usually include exceptions which permit (a) transactions in the ordinary and proper course of business (the so-called Angel Bell exception), (b) paying a
reasonable sum on legal advice and representation, and (c) if the defendant is a natural person, their ordinary living expenditure.
In certain respects, the courts have interpreted these exceptions favourably for defendants. Thus, in relation to legal expenditure, save in exceptional circumstances, it is not for the claimant nor the court to question a defendant’s choice of solicitor nor the nature or amount of work done by the solicitor, who is entitled to “self-certify” that their fees are reasonable.1 A defendant is also permitted to sustain their prefreezing order living expenditure, even if it is lavish and will inevitably lead to their bankruptcy.2
It is therefore essential, when acting for a client who is considering applying for a freezing injunction, to provide clear advice about the wide scope of the exceptions.
Our focus in this article, though, is on whether there are any modifications which claimants can ask the court to make to the exceptions which appear
1 BSC Corporate Acceptances Ltd v Terry [2018] EWHC 2349 (QB), at [47(3)].
2 Vneshprombank LLC v Bedzhamov [2019] EWCA Civ 992.
in the standard form orders.3 We identify two such modifications: first, the addition of a requirement that legal and living expenses must be paid from a particular source; and secondly, an order for enhanced disclosure of the sources from which a defendant is paying their legal and living expenses.
We conclude the article by identifying and considering the changes to the model Part 25 order which are due to come into effect on 1 April 2025.
The authorities
It is possible for a claimant to ask the court not to include any exception for living or legal expenses where the defendant has other assets not injuncted which can be used for that purpose and are likely to be sufficient.4
3 See paragraph 11 of Annex A to Practice Direction 25A and paragraphs 13-14 of Appendix 11 to the Commercial Court Guide.
4 Law Society v Shanks [1988] 1 F.L.R. 504 CA, cf. National Trust Bank v Yurov [2020] EWHC 757 (Comm).
The initial burden will be on the claimant to show this, certainly at the without notice stage, and also to deal with it as a matter of full and frank disclosure. The burden then shifts to the defendant in the event of any dispute about the existence or sufficiency of any exempted assets –a burden which must be discharged at the return date or any subsequent variation hearing.5
Further, where the freezing injunction is proprietary in nature, the defendant will be required to use their own assets rather than the injuncted assets, for the obvious reason that no one should be allowed to use other people’s money, or arguably other people’s money, for their own living or legal expenses.
The claimant’s right to seek a requirement that legal expenses be paid from a particular source was established in Tidewater Marine International Inc v Phoenixtide Offshore Nigeria Ltd.6 In that case, Males J (as he then was) explained the importance of the requirement on the defendant to say where the money was coming from as an opportunity afforded to the claimant to object. The judge dismissed an application to require the parties to concur in an application to the Swiss Court to release funds for the payment of legal expenses in circumstances where, inter alia, the defendant did not satisfy the court that there were no other assets available worldwide.
Further, in the context of legal expenses, the court is entitled to require information as to the source of funds, including in exceptional circumstances as a condition for having an application heard.7 The applicant has the burden of establishing a “properly arguable case” that the funding was or may be from frozen funds and then there must an adequate basis for ordering the disclosure of further information as to the source of funds.
Scope for claimants to seek to modify the exceptions
Proprietary injunctions are different in the sense that a defendant must always use his own money first for living or legal expenses. When a defendant says he cannot, because no non-proprietary funds are available, the court is required to balance the interests of the claimant (who says that the money belongs to them) against the interests of the defendant (who says they need the money to mount a reasonable defence or even to live).8
With personal asset freezing injunctions, however, the startingpoint is always that the defendant can use their own money as they please, subject only to the terms of the injunction. Freezing injunctions provide no security and no priority in the event of insolvency. They are not intended to interfere with the reasonable and normal course of a defendant’s life as it operated immediately before the grant of the injunction. The depletion of the asset base by reason of bona fide transactions in the ordinary course of business or living or reasonable legal expenses is simply part of the scheme which the applicant must accept, as part and parcel of obtaining the benefit of an otherwise powerful and intrusive order.
But where only part of the defendant’s assets is frozen, for example where assets in certain jurisdictions are exempted from the scope of the injunction, the claimant may seek an order that the defendant must use those exempted assets first, leaving the assets specifically frozen by the injunction untouched.
There may be reasons why that may be unfair. For example, a claimant may wish to exclude assets because they will in practice be impossible to enforce against and there would be no point in increasing the potential scope of the cross-undertaking in damages in respect of such assets. But this same reason may inform an argument from the defendant to the effect that it may be difficult to realise assets in some places in the world and use them for living or legal expenses. There may also be sanctions which preclude access to certain assets which are exempted from the freezing injunction.
In summary, a claimant may seek an order requiring the defendant to use exempted assets first, but in appropriate circumstances the defendant may be able to justify opposing such an order.
When it comes to seeking enhanced disclosure of a defendant’s source of funds, there are two different scenarios: first, where the funds used are the defendant’s; and secondly, where the funds used belong to a third party.
With the first situation, there is a square bracketed provision in the standard form exceptions for both living and legal expenses, as follows:
“but before spending any money the Respondent must tell the Applicant’s legal representatives where the money is to come from”.9
In most cases, it will be right to allow the claimant / applicant to police the source of funds.
With the second situation, a defendant is entitled to enjoy the generosity of a third party who wishes to fund his living or legal expenses. Such an arrangement is not caught by the freezing injunction at all and the third party is entitled to fund a defendant to whatever level they choose. But claimants are naturally skeptical about such apparent timely generosity10 and often wish to explore whether the funds being used are in fact the defendant’s, but are being used in breach of the freezing injunction.
5 China Evergrande Group (In Liquidation) v Mei [2024] EWHC 2100 (Comm), a case where the respondent failed to provide the evidence necessary to discharge that burden.
6 [2015] EWHC 2748 (Comm).
7 JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 187 (Ch) and JSC BTA Bank v Ablyazov [2018] EWHC 1368, at [9]-[16].
8 See Marino v FM Capital Partners Ltd [2016] EWCA Civ 1301.
9 CRO v REC and another [2023] EWHC 189 (Comm).
10 In the event that a third party lent money to a respondent, such money would become the respondent’s money and thus subject to the provisions of the Freezing Order. It could be used for living and legal expenses, but only in accordance with the terms of the exceptions (i.e. not in unlimited amounts). The decision in Cantor Index Ltd v Lister [2002] CP Rep 25 may well be wrong in suggesting that borrowing to fund sums in excess of the living and legal expenses limits is permissible.
Without more, a claimant is not entitled to an order requiring the defendant to reveal the source of funds. Where, however, a claimant can show with evidence that there is doubt about any assertions made about the source of funding for living or legal expenses, then the defendant can be required to provide details of that source.
There is no conceptual limit on the level of detail which can be demanded of any defendant as to their source of funding, but there may be a practical limit. It may be that a third party who is not before the court is unwilling to reveal their source of funds, including to the defendant. Ultimately, a defendant can only do what is in their own power, and their maximum effort to obtain and provide information may be an answer to any contempt allegation.
The new wording thus restricts the scope of the exception to the legal costs of the proceedings in which the freezing order is granted, such that extraneous legal expenditure is permissible only to the extent that it constitutes ordinary business expenditure. In our view, this is a helpful clarification, but the footnote is drafted unduly narrowly, as it ought to refer to all forms of extraneous legal expenditure and not just to the costs of other proceedings.
Secondly, the new legal and living expenses exceptions are both accompanied by a square-bracketed requirement that advance notice must be given not only of the source of the expenditure, but also of “approximately how much is to be spent”.
In our view, this is a welcome change. Previously, although defendants would in practice often notify claimants of the amounts of their expenditure, they were not under any strict obligation to do so. Claimants could thus be left without any information at all about how much defendants were spending, which was an unsatisfactory state of affairs.
However, it is important to note the footnote, which states,
Upcoming changes to the exceptions
On 13 February 2025, it was announced as part of the Civil Procedure (Amendment) Rules 2025 (SI 2025/106) that a revised version of CPR 25 will be introduced with effect from 6 April 2025, along with new model orders for freezing and proprietary injunctions. The new models are available on the www. justice.gov.uk website.
The new model freezing order includes some significant changes to the exceptions, compared with the wording in the existing model at Annex A to Practice Directions 25A.
First, the new legal expenses exception will include a squarebracketed requirement that the legal advice and representation must relate to “these proceedings”. An associated footnote states:
“These words may be appropriate if, in the particular case, the cost of legal advice and representation in other proceedings (if any) is considered likely to fall within the ordinary and proper course of business exception in paragraph 9(2) of this model order”.
“The proviso requiring advance notice should only be included where really necessary, more particularly where the amount to be spent is required to be notified. It is not to be included otherwise. It will often be a form of order better sought on the Return Date.”
Thirdly, the business expenditure exception will include a new requirement for the defendant to give advance notice to the claimant of any proposed business dealings or disposals, whereas this had been absent from the previous model order.
This addition is similarly likely to assist claimants to police defendants’ compliance with freezing orders, but it is again necessary to consider the accompanying footnote, which states:
“The proviso requiring advance notice should only be included where really necessary, and should be regarded as exceptional given its potential consequences for the conduct of business. It is not to be included otherwise. It will often be a form of order better sought on the Return Date.”
One can see that the drafters of the new model order have sought to
enhance the notification obligations in the exceptions and thus to improve the ability of claimants (and the court) to police defendants’ compliance. However, this is subject to the important caveat that the enhancements are all squarebracketed and the associated footnotes emphasise that they should be regarded as the exception rather than the norm.
We therefore expect that the new square-bracketed words and footnotes in the model exceptions will be a key battleground at future hearings relating to freezing injunctions. We expect that they will generate numerous authorities of interest to civil fraud practitioners in the future.
This article does not contain legal advice. Anyone seeking advice on English freezing injunctions may contact the authors at aayres@twentyessex.com and andrewbarnsgraham@3harecourt.com.
ABOUT THE AUTHORS
Andrew Ayres KC Barrister Twenty Essex
Andrew Ayres KC has been obtaining and defending freezing and search orders since 1997.
He advises on all aspects of civil fraud litigation, including early pre-emptive remedies through to enforcement, in frauds of all kinds, including trade finance, MTIC, employee, advance fee, Ponzi and crypto.
He has an established commercial disputes practice, with a core of advocacy before courts and tribunals across the globe.
He has been recommended in the legal directories in the following areas: commercial litigation, banking & finance, civil fraud, company & partnership and commercial chancery. He was also nominated for “Chancery Silk of the Year” at the 2024 Legal 500 UK Bar Awards.
Andrew has strong multi-jurisdictional connections, particularly in the Asia Pacific region, the Caribbean and within the offshore community closer to the UK. He is a leading Cayman and Eastern Caribbean advocate and adviser, focusing on all aspects of fraud, commercial, company, insolvency and trusts litigation.
Andrew has a breadth of expertise across a range of sectors and services, including aviation, banking and finance, construction and engineering, energy and natural resources, international trade, joint ventures and partnership, professional liability and risk, structured products and derivatives and TMT.
Andrew Ayres KC - Twenty Essex
Andrew Barns-Graham Barrister 3 Hare Court
Andrew Barns-Graham is a civil fraud specialist who has acted on some of the most high-profile civil fraud cases of the last decade.
The cases on his CV include National Trust Bank v Yurov, Privatbank v Kolomoisky, and Skatteforvaltningen v Sanjay Shah, all of which are have appeared in The Lawyer’s annual lists of the ‘Top 20 cases’ and have given rise to leading authorities on freezing injunctions and other civil fraud matters.
Andrew’s areas of expertise include the various causes of action associated with civil fraud, freezing injunctions (both personal and proprietary), search orders, disclosure orders (e.g. the Norwich Pharmacal and Bankers Trust jurisdictions), conflicts of laws, jurisdiction disputes, asset tracing, and enforcement remedies.
A large proportion of Andrew’s practice is international and he has worked with clients and lawyers from numerous jurisdictions around the world. He is well-versed in the challenges which arise in complex multi-jurisdictional cases involving foreign law issues or related/parallel overseas proceedings.
Andrew Barns-Graham - 3 Hare Court