Appeal court: grant of worldwide freezing order requires grounds for belief in existence of assets

Out-Law News | 21 Jul 2017 | 10:21 am | 3 min. read

An applicant for a worldwide freezing order (WFO) must be able to satisfy the court that there are grounds for believing the subject of the order actually has assets that can be caught by the injunction, the Court of Appeal has ruled.

The judgment "sends a cautionary message that the English courts will not order a broad and speculative WFO over various entities where there is uncertainty over the existence of assets", according to civil fraud and asset recover expert Alan Sheeley of Pinsent Masons, the law firm behind Out-Law.com.

"A WFO is an important weapon to protect assets for the enforcement of a judgment or in support of foreign proceedings," he said. "However, it is crucial for an applicant to have grounds for believing that assets of the respondent or respondents exist."

"The Court of Appeal has sent a clear message that applicants will not be able to obtain a WFO as a form of fishing net which can be cast out in the hope of capturing assets which may or may not exist. Applicants should be in no doubt now as to the test that has to be satisfied: they must satisfy the court that there are grounds for believing that the respondent or respondents' assets exist," he said.

The case concerned an application for interim WFOs against 14 limited liability partnerships (LLPs), owned by Georgian businessman Gela Mikadze and registered in England and Wales. The applicants were six entities responsible for investing the sovereign wealth of Ras al Khaimah, one of the United Arab Emirates, in projects in Georgia. Mikadze had been a senior director at three of the applicants, and was suspected of charges of embezzlement in relation to the projects.

In 2015, High Court judge Mrs Justice Rose refused to grant the orders sought. Although the applicants had been able to show that they had a good arguable case against Mikadze and a good arguable case that, if the LLPs had assets, they were Mikadze's assets and at risk of dissipation, none of the LLPs were likely to have assets anywhere in the world. The applicants appealed, arguing that the judge had applied the wrong test for the existence of assets.

The Court of Appeal, in a unanimous judgment, agreed that it was "not enough for a claimant to assert that a defendant is an apparently wealthy person who must have assets somewhere". It said that it was "somewhat unclear" which test had been applied by the High Court judge, but added that the correct one was 'ground for belief' in the existence of assets.

"Since a claimant cannot invariably be expected to know of the existence of assets of a defendant, it should be sufficient that he can satisfy a court that there are grounds for so believing," said Lord Justice Longmore, giving the judgment of the court. "That is not an excessive burden but if an order is sought against numerous companies or LLPs and those companies and LLPs can show that there is no money in their accounts and the claimant cannot show that the account has been recently active, it may well be right to refuse relief."

The High Court judge had been "entitled ... to accept evidence that many of the [LLPs] had closed their accounts or had only insubstantial sums in them", the Court of Appeal said. However, when it looked in more detail at the financial positions of the LLPs, it found that there were grounds for belief in the existence of assets at four of the 14.

Lord Justice Longmore dismissed an argument from the applicants that a freezing order should therefore be granted against all of the LLPs, because Mikadze could "transfer money at will from one respondent to another".

"I do not consider that a broad brush approach of that kind could be correct … in a case in which the puppetmaster (here Mr Mikadze) is not a defendant," he said.

"The essence of legal personality is that one must look at each personality when the question is whether there are grounds for believing that it has assets which will be caught by an injunction. The ability to transfer assets from one of Mr Mikadze's LLPs to another may be highly relevant to risk of dissipation but is not, in my judgment, legally relevant to the prior question whether there are indeed grounds for believing that there are assets which can be caught by the injunction," he said.

"Following this judgment, where a WFO is sought over the assets of several entities, the English court will assess the grounds for believing that assets exist for each entity individually," said civil fraud and asset recovery expert Alan Sheeley.

"The English court will have no hesitation to only order the WFO over certain entities, if there are not grounds for believing that all the entities have assets. It is therefore important that any application for a WFO is strategically targeted," he said.