Frosted GlassA recent decision in the High Court provided guidance with respect to the apparent conflict between freezing orders that have been granted over assets that are subject to an existing security. Generally speaking, a freezing order should only catch the unsecured elements of assets.

The question facing the court in Taylor v Van Dutch Marine Holding Ltd [2017] EWHC 636 (Ch) was whether TCA Global Master Fund LP (the “Secured Debenture Holder”) required a variation of a freezing order obtained by Kevin Taylor (the “Bridging Lender”). The Bridging Lender had secured a $2.5m judgment over the four defendants who were held to be jointly and severally liable. He was also successful in obtaining a freezing order over all of the defendants’ assets.The apparent conflict was between the enforceability of the Secured Debenture Holder’s existing security versus the prohibition against the defendant, or anyone on his behalf, from dissipating the assets caught by the freezing order. The question was previously answered in Gangway Ltd v Caledonian Park Investments (Jersey) Limited [2001] 2 Lloyds Rep 215 where the High Court held that a variation of the freezing order was required before a secured creditor was able to enforce its existing security over the assets caught by the freezing order. As such, varying a freezing order has remained the method of choice for secured lenders who choose to exercise their security over assets identified in the order.

However, in this case, in contrast to the Gangway case, the High Court held that a variation of the freezing order was not required before the enforcement of a pre-existing security that was held over the assets in question. Mr Justice Mann determined that the Gangway case was based on a misinterpretation of Lord Denning’s judgment in Z Ltd v A-Z and AA-LL [1982] 1 QB 558. In that case, Lord Denning held that:

“Every person who has knowledge of [the injunction] must do what he reasonably can to preserve the asset. He must not assist in any way to the disposal of it. Otherwise he is guilty of a contempt of court.”

Mr Justice Mann emphasised that Lord Denning’s focus was on a disposal by the defendant rather than all disposals. He explained that Lord Denning’s views

“were not intended to deal with a situation where the disposer has his or her own rights which are being enforced and who does not do an act which falls to be viewed as a disposal by the defendant or a dissipation of the asset”.

Where a bank is concerned, Mr Justice Mann explained that withdrawing money from a bank account would be a valid example of a disposal of money by the defendant and was therefore prohibited. Accordingly, a “bank which allows it, is participating in that disposal by the defendant”. This focused interpretation narrows Lord Denning’s dicta to actions that would in some way assist the defendant to dissipate his assets rather than preventing a dissipation of the assets in a general sense.

In providing further guidance, Mr Justice Mann clarified that in a more complex case where a secured creditor is anxious due to an apparently hostile and litigious environment, he would nevertheless recommend taking a “safety-first” approach of seeking a variation of the freezing order before pursuing enforcement of the security. However, having categorised this as a “standard case”, Mr Justice Mann ruled that the secured creditor could pursue enforcement of their security over the assets without applying for a variation of the freezing order obtained against the same assets.

This High Court decision makes it clear that a freezing order is not security and should not be treated as such by the party in whose favour it is granted. Therefore, a secured creditor should be able to enforce its security unfettered by the freezing order, so long as they are not aiding the defendant in a “collusive” manner.

Whilst this judgment seeks to clarify the law in this area, its practical effect is yet to be determined. A key uncertainty is in the interpretation of what Mr Justice Mann has labelled “standard cases” that do not require a variation of the freezing order. Furthermore, the question of exactly how much a bank would need to “participate” in a disposal of the defendant’s assets or the nature of that participation for it to fall outside the scope of a “standard case” is also largely unclear. The answers to these new questions will be dependent on the material facts of individual cases. In the meantime, it is quite possible that secured creditors will continue to take a more cautious and traditional approach by applying for variations of freezing orders to enforce their security until the scope of this judgment becomes clear.