But the Assets are Already Frozen! Where Civil Freezing Orders and Criminal Restraint Orders Collide

Michael Maris takes a look at AA & Ors v BB & Anor [2021] EWCA Civ 1017

Background

The Claimants were two companies and their respective administrators, who alleged in the main proceedings that substantial sums had misappropriated, by or for the benefit of the Defendants, or otherwise in circumstances giving rise to liability on the part of the Defendants.

Independently of the present proceedings, criminal restraint orders (“CROs”) had been made, on application by the Serious Fraud Office (“the SFO”), against the Defendants under the Proceeds of Crime Act 2002. The CROs restrained them from disposing of any of their assets, wheresoever situated, save for in accordance with the terms of the CROs.  At the time of the present appeal, the CROs remained in force.

On 20 August 2020, after the CROs had been granted, the Claimants applied (without notice to either the Defendants or the SFO) for (i) worldwide freezing orders; and (ii) proprietary injunctions against the Defendants.  By an ex tempore judgment on 25 August 2020, the Deputy Judge granted the freezing order, having satisfied himself that:

1. The Claimants had shown a good arguable case in respect of their proposed claims based on misappropriation of funds; and
2. That there was a good arguable case of a current risk of dissipation of assets by the Defendants.

The Deputy Judge declined to grant the proprietary injunction. Notwithstanding that he was satisfied there was a serious issue to be tried, he considered that the proposed orders lacked sufficient specificity in respect of the assets to be frozen.

The Claim Form was issued on 27 August 2020. The application, made on notice to the Defendants, to continue the freezing orders was heard on 7 September 2020.  The Judge acceded to that application and granted the order sought. The Defendants had resisted the continuation of the freezing orders on the specific ground that, in light of the CROs, the Claimants could not establish a real risk of dissipation of their assets, and were granted permission to appeal by the Judge.

The Court of Appeal

David Richards LJ, with whom Simler and Nugee LJJ agreed, focused on the first ground of appeal, which he considered raised the point of principle: that the courts below should have refused to make the order on the grounds that the existence of a prior CRO removed any real risk of dissipation of assets. The existence therefore of a prior CRO was “fatal to any submission that there was a real risk of dissipation” and was a factor that “should prima facie have resulted in no freezing order being made.”

David Richards LJ considered at [19] the statutory regime applicable to CROs, which may be summarised as follows:

• CROs prohibit any specified person from dealing with any realisable property held by that person, where (among other circumstances) there is a criminal investigation with regard to an offence and there is reasonable cause to believe that the alleged offender has benefited from his criminal conduct.
• The purpose of a restraint order is to preserve assets for the purposes of any confiscation order that may be made.
• The power to make a restraint order “(a) must be exercised with a view to the value for the time being of realisable property being made available (by the property’s realisation) for satisfying any confiscation order that has been or may be made against the defendant; (b) must be exercised, in a case where a confiscation order has not been made, with a view to securing that there is no diminution in the value of realisable property.

David Richards LJ then considered the authorities, and drew attention to the following factors:

• There is a fundamental difference between restraint and civil proceedings. Restraint proceedings instigated by the CPS will, subject to the overall control of the court, be under the control of the CPS, a public body whose primary duty is to act in the public interest and not in any private interest. In contrast, the claimant in civil proceedings is seeking to protect his own private interests by the making of a proprietary claim in respect of funds said to have been wrongfully obtained from him. There is no reason why in these circumstances the claimant should be denied relief in private law proceedings in proper protection of those interests which would otherwise be appropriate (Cancer Research UK Ltd v Morris [2008] EWHC 2678 (QB), cited at [30]).
• It is possible that CROs will be abandoned or varied. It is for the CPS to decide whether it wishes to maintain one; if it were to go and there were to be nothing else in place, then the claimant would not have any protection. Similarly, the CRO may be varied to limit it to the amount of sums which are the subject of the investigation in the criminal proceedings. In other words, the CRO is in no way geared or intended to protect the interests of the claimant in civil proceedings, who has his own rights and his own interest in getting his own order, which he controls, to bring about a situation which is not vulnerable to a change of mind by a party to other proceedings or indeed by the court, if the court were to come to the conclusion that the CRO ought to go. Accordingly, the existence of a CRO does not mean that there is no risk of dissipation. (Faya Ltd v Butt [2010] EWHC 3461 (Ch), citied at [31])

David Richards LJ considered these two factors “relevant and legitimate” for a court to consider when deciding to make a freezing order in the present circumstances.  Whilst the factors are not determinative in favour of making a freezing order, neither is the existence of a prior CRO determinative against making such order.

The Judge below had, therefore, rightly considered the two factors, before focusing on several further aspects:

1. There was no provision that would ensure sufficient notice to the claimants to apply for a freezing order in the event that the CROs were about to be discharged;
2. Decisions by the SFO to consent to dealings in assets might affect and undermine the position of the Claimants, who may well have information and expert opinions available to them regarding the nature and value of the Defendants’ assets that is not available to the SFO; and
3. Significant proprietary claims had been made in the present proceedings which, if made out, would remove the assets to which the Claimants are entitled from the scope of the CRO.

David Richards LJ therefore concluded that the Judge had duly acknowledged the prior existence of the CRO as a relevant factor in the exercise of his discretion, but equally acknowledged its possible shortcomings in guarding against a risk of dissipation, before weighing those factors in the circumstances of the case. Accordingly, it was not open for the Court to interfere with his decision.

Having considered the other grounds of appeal, which related to the procedural fairness of maintaining both a CRO and freezing order against the Defendants, David Richards LJ concluded that none of them were well founded.

The appeal was accordingly dismissed.

Comment

This case marks a juncture between what may broadly be termed asset preservation orders in civil and criminal proceedings.  The present appeal makes clear that there is, in principle, no reason why both cannot subsist over the same assets.  There are many practical reasons, such as information sharing between the SFO and a claimant in civil proceedings as to variations in a CRO, why a claimant in civil proceedings is entitled to his own order which remains under his control to safeguard his position.  It is clear, however, that the decision to grant a freezing order where a CRO is in existence remains discretionary and will, therefore, require consideration of all the circumstances of the case.

The fundamental reason why both a CRO and freezing order may be granted in respect of the same defendant’s assets, however, lies in the distinction between public and private proceedings; and the fact that a claimant is entitled to protect his own private interests in civil proceedings, notwithstanding that his means to do so may overlap with measures taken by the SFO in the public interest.  This point is, perhaps, driven home by consideration of the case of the proprietary injunction. Although this did not feature heavily in the present appeal (the Deputy Judge having declined to grant the proprietary injunction), the principle that assets to which a claimant has a proprietary claim would be removed from the scope of the SFO demonstrates that the two sets of proceedings pursue different aims.

Michael Maris
July 2021