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Introduction
Perhaps one of the greatest risks a claimant faces in large commercial disputes is that a defendant may attempt to frustrate the enforcement of a future judgment, most commonly by hiding or moving assets beyond reach. A freezing order is designed to preserve assets pending the outcome of the main dispute and generally it offers strong protection and reassurance to the claimant. However, this is not always the case, particularly when a defendant does not play “by the book” and is willing to do everything possible to avoid meeting his obligations.
Such situations are increasingly common, especially when a defendant holds assets under sophisticated corporate or trust structures in various offshore jurisdictions or when he holds cash that can be easily alienated. To counter such dishonest behaviour, and in order to give teeth to freezing orders, equity has developed the use of disclosure orders, ancillary to the Mareva injunction, an additional equitable remedy that enables the claimant to effectively police and enforce the freezing order.
Why and when policing is needed?
It could be argued that, nowadays, worldwide freezing orders may not always be as effective as they were a few years ago. In this context, disclosure orders have become particularly important in recent years, driven by the globalization of business transactions, the use of sophisticated corporate or trust structures, the rapid development of electronic commerce, the use of Internet in general and the increasing use of technology in all kinds of business transactions. Today, the dissipation of assets by a defendant to frustrate the enforcement of a potential adverse judgment and defraud the claimant is becoming more common – often the rule rather than the exception. As Lord Neuberger said in Linsen International Ltd v Humpuss Transportasi Kimia [2011] EWCA Civ 1042:
“In the increasingly sophisticated world of international movement of goods, assets and money, and the formation of companies and the hiding of assets, the courts have to be astute to ensure that the law keeps pace with modern developments and is not flouted.”
In practice, a disclosure order can be just as important as a freezing order, as it effectively reinforces the latter in the sense that not only does it help identify unknown assets belonging to the defendant but, it also acts as a deterrent factor for the defendant to alienate such assets. A disclosure order is an extremely useful and powerful tool in the hands of the claimant since, as noted by Lord Woolf, they provide the teeth which are critical to the freezing order.
The rationale for issuing ancillary disclosure orders in support of freezing injunctions is set out in the White Book of 2016:
“For the purpose of rendering a freezing injunction effective (before judgment as well as after judgment), the court may make orders requiring the defendant (1) to make a statement disclosing his assets, (2) to give discovery of documents, and (3) to provide information. Such orders can assist (1) in determining the existence nature and location of assets, (2) in clarifying questions of title concerning assets, and (3) in identifying third parties to whom notice of the injunction should be given for the purpose of ensuring that they do not avertedly or inadvertently assist the defendant in the removal or disposal of assets”.
As emphasized in the case of Malofeev v. VTB Capital plc (2011) EWCA Civ 1252:"
“An order for disclosure of assets normally accompanies a worldwide freezing order. Such an order is usually necessary to give the worldwide freezing order teeth”.
The English Court of Appeal re-affirmed the court's jurisdiction to grant ancillary disclosure orders in support of freezing injunctions in JSC Mezhdunarodniy Promyshlenniy Bank & Anor v Pugachev [2015] EWCA Civ 139. In this case, the defendant had interests in certain discretionary trusts, although the trusts' assets themselves were not directly covered by the injunction. The CA ordered the defendant to disclose information regarding the trusts as well as any relevant documentation that was under his control.
To put it simply, if the court can issue a freezing order, in the appropriate circumstances it can also issue any additional ancillary orders needed to make that freezing order more effective. In PSJC Commercial Bank Privatbank v Kolomoisky and others [2018] EWHC 482 (Ch), it was held that:
“(2) The power to make a freezing order under … also carries with it the power to make whatever ancillary orders are necessary to make the freezing order effective ... Furthermore, the court has the power to make ancillary orders on the grounds that it is just and convenient to do so in order to ensure the effectiveness of an earlier order...”
The approach of the Cyprus courts on the matter has been consistent to the above referenced English caselaw. As stated by the Cyprus Court of Appeal in the case of Boris Mints a.o. v Pavel Shishkin (Civil Appeal No. Ε69/20, 10/1/2024):
“As regards worldwide disclosure orders, these, as has been established in case law, are ancillary, providing the claimant with the necessary ability to monitor compliance with the freezing orders...”
Also, the Supreme Court of Cyprus, in the case of In the matter of theApplication of Nikitovic (Civil Application No. 162/21) indicated that mandatory or ancillary orders are usually issued when there are special circumstances or to assist the proper administration of justice, or ancillary to the work of the court to ensure the effectiveness of another order or judgment of the court.
Hence, as a general rule, the Cyprus courts will issue a disclosure order ancillary to a freezing order, when on the basis of all the facts and circumstances of the case they conclude that there is a real risk that a potential judgment in favor of the applicant would remain unsatisfied. As per Ninemia Maritime Corporation v. Trane Schiffahrtsgesellschaft GmbH (Niedersachsen, The) (1983) 1 WLR 1412, it is not necessary to show an unlawful intent, although, where such intent is established, the court will be more inclined to grant the order.
When ancillary relief is not required
Prior to granting ancillary disclosure orders the Court is expected to strike a balance, meaning disclosure should not be excessively burdensome on the defendant. If it is determined that there is no need for policing or supervision, the court should exercise its discretion to refuse disclosure.
The balance that must be struck was considered in Raja v. Hoogstraten (2004) EWCA Civ 968,1 where the Court observed:
“The problem in cases where an order for disclosure has been made at the same time as, and in order to give teeth to, a freezing order made without notice to the defendant is that the freezing order may be set aside after hearing full argument on both sides. If so, it will then be seen that there was no proper basis for the disclosure order but, by that time, the defendant may have been irremediably prejudiced by the disclosure of assets which he should not have been required to disclose. On the other hand, if it is held after full argument that the freezing order should stand, then the claimant may be irremediably prejudiced if the order has not been capable of being policed in the meantime. The court is faced with the position (familiar, also, in other contexts) that whichever course it takes on an application which has to be decided without full argument may lead to irremediable prejudice to one side or the other. There is a balance to be struck".
Hence, when exercising its discretion, the court must reach its decision by carefully balancing the potential prejudice that may be suffered by the claimant against that which may be incurred by the defendant.
Conclusion
In conclusion, freezing orders are key to preventing asset dissipation, but sometimes their effectiveness may depend on ancillary disclosure orders compelling defendants to reveal crucial information about their assets. Courts must carefully balance the potential prejudice to both parties when deciding on such orders, ensuring fairness while protecting the integrity of the freezing injunction. Ancillary asset disclosure should not be seen as a broad disclosure mechanism but only as the means to assist claimants to monitor compliance of the defendant with the freezing injunction and ensure that a potential judgment in their favor will not remain unsatisfied.
Footnote
1. Subsequently cited and followed by the District Court of Nicosia in Frugal Consultants Ltd v Strongfield Marketing Ltd (8/11/16).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
