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GUEST ARTICLE: Notification Orders - A Less Nuclear Option In Legal Cases?

Catherine Penny

12 April 2017

An issue that has come to light in recent times is when in divorce cases and other disputes, one party tries to hide assets, or put them out of reach of the other party. Given that some of the sums involved can be large, this is clearly an issue that advisors to wealthy individuals need to be aware of. With that in mind, this publication welcomes the contribution here of Catherine Penny, senior associate at law firm Stevens & Bolton LLP. The editors here don’t necessarily endorse all the views of guest contributors, and invite responses and additions to debate. The can email if they wish to contact us.

The so-called “nuclear” weapon in the armoury of those attempting to prevent an opponent from hiding assets, usually as part of a wider legal dispute, is the freezing injunction. This is available where a claimant is concerned that their opponent will shift assets around (for example to family members, companies or trusts) so as to avoid having to pay out to the claimant on judgment day. 

The order can freeze the defendant’s assets generally or be limited to specific assets capturing everything from bank accounts and shares, to property and jewellery. The defendant is usually permitted a limited fund to pay legal fees and modest living expenses. But as seen in the High Court as a part of the recent legal dispute between property tycoons Nick and Christian Candy and Mark Holyoake, there is an alternative to a “freezer”; the relatively novel “notification order”. This requires a defendant to notify the claimant before any assets are sold or moved. 

Convincing the Court to grant a freezing or notification order is not straightforward. A claimant has to show the Court: 

•    they have a decent claim against the defendant; 
•    there is strong evidence that there is a risk of the defendant moving their assets out of reach – the evidential threshold for this is a high one; and 
•    the ‘balance of convenience’ is in their favour. Here the judge has to weigh up the impact on the defendant if the injunction were granted and the impact on the claimant should the injunction not be granted and the defendant dissipate their assets 

Freezing orders
Usually assets will be frozen for the duration of the litigation, at most, but given that this could be over a year, significant interference could be caused to a defendant’s life. Sometimes even the stigma of the application for a freezing order being made can cause reputational damage to a defendant. 

The intrusion does not stop there; part of a freezing order typically includes the defendant providing a list of their assets so that the order can be policed. This issue is frequently one of the sticking points for high net worth and ultra-high net worth individuals: the majority of disclosure orders sought in these cases require disclosure of not only assets in their own name, but also assets in which they have a beneficial interest of a particular value or percentage. This can be a very invasive and detailed exercise, as the JSC BTA Bank vs Ablyasov litigation demonstrates. For many, disclosure of these details is an enormous invasion of their private and personal affairs, which can sometimes give rise to additional litigation.  

A freezing order application is expensive in terms of legal costs and the stakes are high, not only since a claimant will have to provide a “cross undertaking in damages” - confirmation that if the defendant suffers loss as a result of the freezing order, and it turns out it should not have been granted, the claimant will compensate the defendant (for example if they have been unable to run their business and profits have suffered; this may potentially extend to missed investment opportunities). 

Provided the criteria can be met and the court is convinced, a freezing order can considerably impact the defendant, so it also has the potential to improve the bargaining position of the claimant who successfully obtains one. But applying for a freezing order and failing will be an expensive process (the claimant will have to pay not only their own costs, but most of the defendant’s costs) and will leave a claimant with a bloody nose; not a good look in any potential settlement discussions.

Notification orders
It has been argued that a notification order is less draconian than a freezing order - after all it would not prevent the movement of assets as such, so why should the same level of evidence of risk of dissipation be required? The English Court of Appeal has recently confirmed that the criteria are the same, including in relation to the risk of dissipation. There is no “injunction-light” option, even if you’re ‘only’ asking to be given a warning before an asset is moved, rather than looking to freeze someone’s property outright.

The recent court decision, one of many in the hard fought litigation between the Candy Brothers and Mr Holyoake, included some useful comments for those who hold their assets in trusts and offshore companies. Often it is argued that trust structures make it easier for assets to be moved and it will therefore be more straightforward for a defendant to distribute their assets elsewhere. Here, the judge commented that simply the existence, or possibility, of using complex and offshore corporate and trust structures, was not enough to demonstrate a risk of dissipation - the claimant has to prove the risk of dissipation. 

No one wants to be on the end of a freezing order application, but if in that position, here are five key thoughts to keep in mind:

1.    The burden is on the applicant to make good on the application and provide evidence to support each of points noted above – throwing allegations around of previous ‘questionable’ business dealings without evidence of a risk of dissipation is unlikely to be good enough;
2.    Consider what the claimant says about a risk of dissipation – the fact that assets are held in trust structures will not be enough. There needs to be evidence of an attempt to move the assets which is more than a mere possibility;
3.    Think about how your life and business would be affected by having your assets frozen or having to notify the claimant each time you wish to sell or move an asset;
4.    What is the maximum value of the claimant’s claim? If your assets exceed that amount, then it would be unduly restrictive for any order to ‘bite’ in respect of all of your assets. It should be limited only to those assets necessary to give the claimant the protection they are seeking; and
5.    Often to halt an application for a freezing order (and the same could be true of a notification order), a defendant will agree to not to dispose of assets unless the applicant has been given prior warning, which can take the wind out of the sails of a claimant attempting to pursue this line of attack. By refusing to accept this, there will no doubt be a detrimental impact on the claimant from a costs perspective and this may also count against them when the judge considers the application itself.