Using freezing orders to tackle crypto fraud in Hong Kong

Out-Law Analysis | 28 Sep 2022 | 2:56 am | 3 min. read

The recent extended downturn in cryptocurrency prices has brought an increase in crypto-related disputes involving individuals, crypto exchange platforms, crypto traders and crypto developers.

In some of these claims, there is a need to freeze the assets and to apply for injunctive remedies at the Hong Kong High Court. One of the legal tools to freeze stolen assets is to apply for a Mareva injunction, also known as freezing order, to prevent the suspected fraudster from dissipating the assets in question.

Obtaining a freezing order

Mareva injunctions are commenced by filing an application ‘ex parte’, without giving notice to the other party. The victim must therefore comply with the requirement of “full and frank disclosure”, showing the court the full picture of the case - including facts that are unfavourable to their case - so that the court can assess the merits of granting an order in the absence of the defendant’s participation.

If an injunction is granted, it will normally be valid for only a short duration. Both parties will then return to the court for the court to determine whether the injunction should continue. 

A Mareva injunction takes effect as soon as it is pronounced by the court, even before the paperwork is done. However, it does not have retrospective effect and may be subsequently varied or discharged.

It is a contempt of court to disobey an injunction. The defendant may be fined, imprisoned or have their assets seized. Any third parties notified of the order who knowingly assist or permit a breach will also commit a contempt of court.

Granting the order

Good arguable case

The test for granting a Mareva injunction is that the applicant should have a “good arguable case”. This is a threshold higher than other types of injunctions which normally only require the existence of a “serious issue to be tried”. However, the applicant does not necessarily need to prove that there is over 50% chance of success or that they are likely to win.

Assets within the jurisdiction

Courts in the Hong Kong Special Administrative Region (SAR) will normally require proof that the defendant has assets within Hong Kong SAR.

Real risk of dissipation of asset

Normally, the applicant for an injunction needs to produce solid evidence to show that there is a real risk that the defendant would dissipate the assets within Hong Kong SAR or remove them from Hong Kong SAR in order to defeat the claim or otherwise improperly.

Relevant factors include the nature of the asset to be dissipated and the nature and financial standing of the defendant. In fraud cases, if the applicant is able to prove a good arguable case, courts are more often willing to infer a real risk of dissipation.

Balance of convenience in favour of the grant

The applicant will normally need to show that it will not be adequately compensated by damages if the injunction is not granted. It also needs to show that the balance of the risk of doing an injustice is in favour of the grant. Factors which the court will take into account here include whether the defendant will face real hardship if an injunction is granted to preserve the current status.

Undertaking as to damages

Courts will normally require the victim to promise to compensate the defendant if the courts later find that the injunction order has caused loss to the defendant, unless there are good reasons not to do so.  This promise could be given in the form of a bank guarantee.

How about a tactical gamesmanship?

Even if a victim successfully obtains a Mareva injunction until the trial, the court may consider it as an abuse of process and has power to set aside the injunction if the victim unreasonably delays bringing their case to trial. ‘Trial’ here means the main hearing where the court decides on the merits of the case: who is right or wrong, liability of parties and compensation.

International nature of a cryptocurrency fraud

A cryptocurrency fraud, like any cryptocurrency transaction, may often involve various legal jurisdictions in which the fraudsters, recipient wallet holders and relevant cryptocurrency exchanges are based. Victims should therefore consider whether they need to seek a “worldwide” Mareva injunction. Where this is the case, the applicant will need to comply with additional requirements such as being able to prove that the defendant has no or insufficient assets within Hong Kong SAR to satisfy the claim and whether it has assets outside Hong Kong SAR.

Hong Kong SAR courts have jurisdiction to grant injunctions in aid of foreign proceedings where such proceedings can give rise to a judgment that is enforceable in Hong Kong SAR.

In Nico Constantijn Antonius Samara and Stive Jean-Paul Dan (2022), a Bitcoin seller, Samara, sued his agent for failure to account for Bitcoin transferred by him to his agent in respect of a sale and the proceeds of that sale. Samara was granted a Mareva injunction early in the course of the litigation. After a full trial, the court ruled in favour of Samara and granted him various reliefs including the extension of a Mareva injunction to freeze some Bitcoin and funds disposed of previously.

Co-Written by Joyce Chow of Pinsent Masons.

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