By Peter McMaster and Jeremy Snead From Appleby

When plaintiffs sue for substantial damages they need to be confident that the defendant has assets to meet a judgment. That does not just mean knowing that the defendant presently has assets, it means being confident that the defendant won’t re-arrange their affairs when sued to put assets beyond reach of execution of judgment. Where there is real risk that assets will be dissipated to defeat judgment a plaintiff has the option of seeking an order freezing assets pending the outcome of the law suit. That, however, is an intrusive remedy that requires good evidence of a risk of dissipation and requires the plaintiff to able to give a credible cross- undertaking (often backed by security) to make good any losses the order may cause. There are cases where an order cannot be obtained even though there is a genuine concern about dissipation because the plaintiff cannot produce sufficient evidence to satisfy the test applied by the court for proving that the risk is “real”. In other cases an order cannot be obtained because the plaintiff cannot provide security for the sometimes substantial sums that may be required to back up a cross-undertaking in damages.   Following a recent judgment in England it seems that there is a new form of protection available – the Notification Injunction. This seems to require a lower standard of proof of dissipation risk and a lower liability on the cross-undertaking, removing some of the difficulties for the plaintiff.

On 29 April 2016 Mr Justice Nugee handed down a judgment, in the Chancery Division of the High Court of England & Wales, in which he considered whether as an alternative to a full blown freezing order the Court had jurisdiction to make an order that prevents a defendant from dealing with assets without first notifying the plaintiff. The purpose of the notification is to give the plaintiff, if so advised, the chance to make a full blown application to freeze the asset in question. The judge based his judgment on the fact that that court has power to prevent a party to litigation dissipating his assets so as to have the effect of rendering a later judgment to be one that goes unsatisfied. The judge actually concluded that a defendant owes a claimant an obligation not to behave in this way. This is a relatively novel idea and it remains to be seen how it will be received by other judges and higher courts. Novel though the premise may be, the conclusion that the court has power to restrain such behaviour as part of a broader package of restrictions is well founded.

The judge noted that it was well established that a full blown freezing order could properly include provisions requiring notification of intended transactions before they occurred and reasoned that this type of order was within the established arsenal of remedies that a court could grant to restrain potential dissipation. In order to grant a full blown freezing order the court must be satisfied that the plaintiff’s substantive case has merit – that it is a good arguable case. The court must also be satisfied that the plaintiff can establish that without a freezing order there is a real risk of dissipation of assets. The judge decided that both requirements had to be satisfied in order to obtain a notification injunction. If the matter had rested there then the notification injunction would be of little interest, because it would be just as easy (or as difficult) to obtain a freezing order as a notification injunction.

In assessing the evidence before him, however, Nugee J recognised that in many respects the evidence on dissipation was inconclusive. He then made a crucial finding:

“It is I think also relevant that the proposed notification injunction is less intrusive than a freezing order; I take the view that this is relevant to the degree of risk which needs to be shown before the Court can be persuaded to intervene. For the reasons I have given I am satisfied that there is such risk of dissipation as to justify the Claimants’ fears and to justify in principle the Claimants seeking and obtaining relief from the Court in the form of a notification injunction.”

In other words, if you don’t have enough evidence of risk of dissipation to get a freezing order, you may nevertheless be able to get a notification injunction. This opens up new possibilities for plaintiffs; a lesser remedy where none existed before.

The judgment concludes with a discussion of fortification of the plaintiff’s cross-undertaking. A plaintiff who asks for a freezing order will have to undertake to the court that it will make good any loss to the defendant that results from the order if it should later turn out that the order should not have been made. In many cases the court will require security to be provided for the undertaking and the security is often substantial. It can exceed a million dollars. The difference between a freezing order and a notification injunction is that nothing is frozen. As the judge pointed out, this may have a dramatic impact on the loss that might result from the order and may correspondingly reduce the security needed to support the notification injunction. Again, this reduces the cost and the difficulty of relief for a plaintiff. However, the implications for the defendant having to make such a notification may be more wide-ranging. The benefit of requiring fortification for freezing relief is to provide ready recourse to a fund for any proven damage. Giving notification of an imminent transaction may give rise to an application for freezing relief for which a cross-undertaking is given but a reasonable time for providing security is allowed. The freezing relief will fall away if the security is not provided, but in the meantime a bargain may be lost or good will soured. The judge has dealt with this issue cautiously, adjourning the question of providing security for the cross-undertaking to allow evidence and a greater understanding of how the notification restriction has affected the defendant in practice.

In a final piece of good news for plaintiffs the judge also accepted that in a suitable case a notification injunction could be granted to require notification of transactions after they occur.

This decision breaks new ground. It holds out the prospect of tailored relief that is proportionate to the needs of plaintiffs and more readily accessible with less immediate risk to the plaintiff. It reflects what often happens in practice on applications for freezing orders by way of compromise. It is not unusual for a defendant faced with a freezing order to agree to give a notification undertaking in lieu of a freezing order being granted and for the plaintiff or the court to accept that undertaking in lieu of a full blown freezing order. As the judge remarked, orders of the sort he made have commonly been granted in practice, but this is the first decision in which the question whether a notification order can be granted as free standing relief has received detailed judicial consideration. Freezing orders are frequently sought and granted in offshore jurisdictions, both in support of proceedings offshore and onshore and the rationale applied by the judge is equally applicable in these jurisdictions. This is a developing jurisprudence that therefore deserves to be closely watched.

SOURCE: www.applebyglobal.com