British Virgin Islands: Pre-Emptive Strikes To Freeze Assets

Freezing Orders/Mareva Injunctions.

Since the early 1970's, Courts in the British Commonwealth have moved to respond to the dishonest dealer who may, if given the opportunity to do so, seek to avoid his obligations by concealing evidence, dissipating or transferring assets, and resorting to delaying tactics. The dramatic creation of the ex parte Mareva injunction and the Anton Piller order represent two of the most important accomplishments of modern English legal reform. These extraordinary remedies put the victim of financial crime in a position of obtaining meaningful pre-emptive and pre-judgment asset freezing and evidence search and seizure relief. They are, however, very special. They can and have been abused.

As the Right Honourable Sir Harry Woolf indicated in his September 1991 forward to the book authored by Goldrein, Ians and Wilkinson, titled, Commercial Litigation: Pre-emptive Remedies (Sweet & Maxwell):

Given the serious damage that can be done by the grant of a Mareva injunction, pre-emptively freezing the assets of a person who has no knowledge of the application or the order, English Courts have imposed very strict requirements upon parties seeking this extraordinary relief. The victim must show that it has a good and arguable case on the merits. An affidavit that is detailed and that narrates the facts giving rise to the fraud must be sworn. For this, a dissipation of assets must be demonstrated. Full and frank disclosure must be made of the nature of the victim's case, and of any defense, which the Defendant has expressed, or can be anticipated.

Today, in appropriate cases, British Commonwealth Courts will grant a Mareva injunction that has worldwide effect. The alleged fraudster and his puppets, including the banks within the territorial jurisdiction of the Court, can be enjoined pre-emptively from permitting the transfer of any assets belonging to the Defendants. Thus, a bank account at, say, the Royal Bank of Canada in Nassau, if frozen by the pronouncement of a world-wide Mareva injunction by the Supreme Court of the Commonwealth of the Bahamas, would have the effect of freezing funds anywhere in the world owned by the Defendants, and held at other branches of the Royal Bank of Canada, whether they be located within the territorial boundaries of the Bahamas or not. The power to make such an order is based on the Court's in personam jurisdiction over persons who are located within its territorial boundaries – such as an international bank.

The Mareva injunction with worldwide effect is but an example of the expansive mood of English common law Courts to be flexible and original in addressing, in part, serious fraud. It first found expression in 1988 in the English High Court case of Republic of Haiti v. Duvalier [1990] 1 Q.B. 202.

In most of the British Commonwealth, there are a panoply of ancillary forms of extraordinary remedies which the Court can attach to a Mareva injunction enjoining the transfer of assets. These ancillary forms of relief include (a) an order compelling the Defendant to disclose, by affidavit, his assets world wide and to deliver up chattels; (b) an order allowing representatives of the plaintiff, in the presence of a Court-appointed supervising lawyer to conduct a private search of the home or office premises of the Defendant to seize any relevant documents (which is sometimes known as the piling of an Anton Piller onto a Mareva); (c) an order compelling the delivery up of the passport of the Defendant; and, (d) under a writ ne exeat regno, an order restraining an individual from leaving the jurisdiction of the Court during the pendency of the proceedings.

Once sufficient information has been obtained, ex parte, to enable a claimant and his team to establish with reasonable certainty the location of assets, the next step, provided that sufficient assets have been uncovered, is to proceed to freeze those assets ex parte. The need for such freezing relief should be supported by a comprehensive factual record which establishes the wrongdoing, the provenance of the funds which have been misappropriated, and the current location of those assets, all linked together by a framework of evidence which has been secured by legitimate means and which amply supports the case for the relief sought. However, a number of important considerations come into play when seeking such extraordinary relief, and utmost care must be taken to ensure that proper procedures have been applied and followed throughout the initial investigative process.

The Extraordinary Nature of the Relief – The Need for Disclosure.

As both search and freezing orders are applied for without notice to the defendant (or ex parte), the following practical principles must be borne in mind.

(a) Any claimant for such an order must act in the utmost good faith and disclose to the court all matters which are material to be taken into account by the court in deciding whether or not to grant relief without notice and if so, on what terms. Failure to do so can lead to any order being set aside and the claimant being faced with what could be a substantial damages claim for wrongful freezing of assets. In The Gadget Shop Ltd v The Bug Com Ltd & Ors, an English Court held on 14 June 2000, that an Anton Piller private search and seizure order would be set aside because the claimant ought to have informed the judge making the order that:

1. there was a possibility that the search may have had to be carried out at the home of an unaccompanied woman;
   
   
2. the supervising solicitors were partners of the claimant's firm;
   
   
3. there was no undertaking by the claimant not to inform anyone else of the proceedings;
   
   
4. the supervising solicitors did not have any material recent experience of the execution of search orders; and
   
   
5. a set of confidential documents was going to be used by the search team.
   
   

(b) If an inter partes application is made by the defendant to discharge the injunction that was obtained on the basis of the alleged non-disclosure of a material fact at the ex parte hearing, the court will consider whether that application should be heard, together with the claimant's application to continue the injunction on the merits. See, Network Multimedia Television Ltd v Jobserve Ltd [The Times – 15 December 2000].

(c) At the ex parte hearing, the court invariably requires the applicant for a Mareva injunction freezing assets to give an undertaking to abide by any order for damages and costs which may be made if the defendant suffers loss as a result of such orders being obtained and the court is of the opinion that the claimant should compensate him. The law relating to such undertakings and enquiries as to damages was reviewed by the English Court of Appeal in Yukong Line Ltd v Rendsburg Investments Corporation & Ors in December 2000, where the court considered that the defendant could not establish that he had suffered any loss. The undertaking is given to the court and not to the defendant and any breach would be in contempt of court. The court can, if it considers it appropriate, secure such an undertaking by way of a bond or other form of security.

(d) The claimant must have a good and arguable case to obtain a Mareva injunction; and a strong prima facie case on the merits to obtain an Anton Piller order.

(e) There must be a real risk that the judgment may go unsatisfied.

Some factors in establishing whether there is a real risk that any judgment may go unsatisfied include:

1. The nature of the assets which are to be the subject of the proposed injunction and the apparent ease or difficulty with which they could be disposed of or dissipated.
   
   
2. The nature and financial standing of the defendant's business.
   
   
3. The length of time the defendant has been in business.
   
   
4. The domicile or residence of the defendant.
   
   
5. If the defendant is a foreign entity, the availability or non-availability of any machinery for reciprocal enforcement of English judgements.
   
   
6. The defendant's past or existing credit records.
   
   
7. Any intention expressed by the defendant about future dealings with his English assets, or assets outside the jurisdiction.
   
   
8. The connection between the defendant company and other companies which have defaulted.
   
   
9. The defendant's behavior and response to the claimant's claim.
   
   
10. Whether a freezing injunction should be granted against assets in the name of, or claimed by, a third party.
    
    

Ancillary Orders.

It is unusual for an English Mareva injunction to freeze assets alone. Normally, such an injunction contains a number of ancillary orders designed to ensure that the claimant is given full disclosure of the apparent fraudster's assets and the whereabouts of the stolen money. A standard order will, therefore, contain a requirement that the defendant disclose in an affidavit the whereabouts of his assets and their value. If there are grounds for believing that disclosure is incomplete, one can apply for an order that the defendant be cross examined on the information he has provided. The defendant, however, may claim that he has the right to refuse to make such disclosure on the ground of privilege against incrimination (See, Memory Corporation Plc v Sidhu & Anor ChD (Arden J) [2000] 1 All ER 434). Orders can also be made:

1. requiring the defendant to remain in the jurisdiction and to deliver up his passport where there is a danger that he will attempt to leave it without giving full disclosure of his assets;
   
   
2. to deliver certain of his assets into the custody of the claimant's solicitors; and
   
   
3. to sign a document directing his bank to disclose information to the claimant.
   
   

Ancillary orders are generally said to be made to 'police' the Mareva, or in other words to ensure that it is not rendered ineffective by a Defendant who is adept at covering his tracks and frustrating attempts at enforcement. A Mareva is only as effective as it is enforced. Thus it is of paramount importance to ensure that as much information as possible concerning the location of the obligor's assets is uncovered prior to the application for the relief. The Mareva order should be served on as many parties as possible, in order that the defense of 'no notice' cannot be paraded as a justification for the transfer of assets by a third party such as a bank.

Temporary Restraining Orders – US.

A party seeking a temporary restraining order ("TRO") – leading to a preliminary injunction, freezing assets pre-judgment, in the United States, must establish by the preponderance of evidence that he or she possesses certain and clearly ascertainable rights that need protection, that there is no adequate remedy at law, that irreparable injury will occur without injunction, and that there is a reasonable likelihood of success on the merits of the case. The tests or requirements are roughly similar to the standard of review used in respect of to the grant of Mareva injunctions the relief in Commonwealth jurisdictions.

In deciding whether to grant a motion for a preliminary injunction, a trial court must balance the equities and relative inconvenience to parties and determine whether a greater burden will be imposed on the defendant by granting the motion than on the plaintiff by denying it. (See, Ron Smith Trucking Inc. v. Jackson (1990), 196 Ill. App. 3d 59). In order to show a likelihood of success on the merits entitling a party to a preliminary injunction a party is not required to make out a case in which all events will warrant relief at a final hearing. All that is necessary is that the petitioning party raise a fair question as to the existence of the right claimed, that he lead the court to believe that he probably would be entitled to the relief prayed for if proof should sustain his allegations, and that he make it appear advisable that the position of the parties should stay as they are until the court has had an opportunity to consider the case on the merits.

A preliminary injunction is an extraordinary remedy and to warrant issuance, a party must clearly show a need to preserve the status quo in that such party would be susceptible to irreparable damage if the injunction does not issue.

Generally, pre-judgment, injunctions, freezing assets rest on the authority of courts of equity to restrain persons within their limits of jurisdiction from doing inequitable acts that wrong and injure others. The grant of a preliminary injunction is within the discretion of the court. Since a preliminary injunction is granted before a hearing is conducted on the merits of the case, justification for the issuance of an injunction can be found principally in the sufficiency of a complaint.

For there to be an adequate remedy at law, that remedy must be clear, complete, and as practical and efficient to the ends of justice and its prompt administration as the equitable remedy. Additionally, irreparable harm occurs only where monetary damages cannot adequately compensate injury or the injury cannot be measured by pecuniary standards.

In order for a party to show the likelihood of success on the merits he is not required to make out a case that will in all events warrant relief on the merits; it is only necessary that the moving party raise a fair question as to the existence of the right claimed and that he will be entitled to relief prayed for if proof should sustain his allegations.

Once a party who seeks a preliminary injunction raises a fair question as to the existence of the right claimed, leads the court to believe that he would be entitled to the relief prayed for and that it is advisable that the party's positions stay as they are until the case is considered on the merits the equitable doctrine of balancing of equities or convenience may be applied and the trial court may determine whether the burden on the defendant, should an injunction issue, outweighs the benefit to the plaintiff. However, such a doctrine is inapplicable where the defendant's actions were done with full knowledge of the plaintiff's rights and with an understanding of the consequences that might ensue.

The defendant, by acting swiftly, cannot deprive the court of the right to compel restoration of the status quo by a preliminary injunction.

With reference to the question of whether a case is a proper one for equitable relief, it has been said that:

As a prerequisite to the grant of a preliminary injunction, the plaintiff is required to establish a probability of the ultimate success on the merits of the case, as well as the immediate need for the injunction to preserve the status quo and to prevent irreparable injury to its rights of property. Where no answer has been filed, the injunction may be issued based solely on the sufficiency of the complaint. Where an answer has been filed, both the answer and the complaint must be considered. If the answer contains denials of material allegations of the complaint, a hearing on those matters must be held before the injunction may issue. — See, Schlicksup Drug Co. v. Schlicksup (1970), 120 Ill. App. 2d 181.

With respect to the grant of a preliminary injunction, to sustain a showing of irreparable injury justifying the same, the plaintiff does not need to show that injury is beyond repair or beyond compensation in damages-but, rather, only that the transgressions are of a continuing nature.

For the purpose of determining whether a complaint specifies facts sufficient to warrant issuance of a preliminary injunction, the standard by which to measure the complaint is not the same as the standard to evaluate the case of the time of the final remedy. The purpose is not to determine contradicted rights. The plaintiff need only raise a fair question as to the existence of a right to the relief requested.

The June 17, 1999 decision of the Supreme Court of the United States in Groupo Mexicano de Desarrollo, SA et al v. Alliance Bond Fund, Inc. et al 527 U.S. 308 has been widely misunderstood as having held that U.S. District Courts do not have the jurisdiction to grant Mareva injunction-type relief, freezing the assets of a defendant pre-emptorily, before judgment. The 5-4 majority judgment of Justice Scalia does not say this. What it says is that, if a plaintiff's claim is based on an in personam claim in debt or for damages, U.S District Courts do not have the power to freeze the assets of a defendant before judgment. However, where a plaintiff assets a cognizable, in rem or equitable claim to specific assets of a defendant or seeks a remedy involving those assets such as may be asserted as arising from a fraud, a U.S. District Court has the power to invoke equity to preserve the status quo pending an adjudication on the merits where a remedy at law might prove inadequate and where the preliminary relief furthers the court's ability to grant the final relief sought. U.S. District Courts can also freeze assets before judgment if a specific state or federal statute relevant to a plaintiff's claim authorizes the grant of such a provisional remedy (ie, as in the instance of many state or federal consumer or securities fraud statutes).

In the post Groupo Mexicano case of U.S. ex rrel Rahman v. Oncology Associates 198 F.3d 489(CA 4 (Md) 1999), the court found that, where interim equitable relief is authorized and the public interest is involved, courts of equity may go much further both to give and withhold relief in furtherance of the public interest than they are accustomed to go only when private interests are involved. This case also found that a constructive trust is an equitable remedy even though it might ultimately reach a fund of money. In this case the District Court found that it had authority to issue a preliminary injunction freezing assets of a doctor and related entities under its traditional equitable powers, even though money damages were also sought by the government, in an action alleging that the doctor and other defendant's engaged in fraudulent billing schemes involving payments by Medicare and civilian health and medical programmes, and seeking the imposition of a constructive trust on fraudulently obtained assets, and to avoid fraudulent transfers among entities. In these circumstances, an injunction was a reasonable measure to preserve the status quo in aid of the government's claims, and the restrictions imposed were designed to enable or aid the district court in giving the relief requested.

The Saisses Conservatoires and Hypothéques Judiciaire Provisoire – France.

In France, extraordinary pre-emptive ex parte relief calculated to freeze assets is available. However, the legal analytical construct upon which French asset freezing relief is based is derived from a considerably different legal tradition. As a consequence, the burdens that must be met by a victim of serious fraud in France are perplexing in that, on the one hand, they are less stringent (in that there is no requirement of a showing of an intention to sequester assets), and yet are seemingly impossible (referring to the requirement that there be a showing of a debt certain owed by the defendant to the plaintiff).

Under French law, as in most mature legal systems, a showing that there exists a jural relationship between the plaintiff and the defendant is an essential requirement before any manner of extraordinary asset freezing relief can be obtained. That is to say, there must exist a legal relation between the parties sufficient for the Court to consider granting, for example, a saisies conservatoire freezing funds held on deposit in a bank account or a hypothéques judiciare provisoire (a provisional judicial mortgage), freezing real estate in France.

The juridical nexus between a fraudster and a victim that is capable of recognition by Anglo-Saxon legal systems, in the context of a case involving the alleged commission of a tort of deceit or conspiracy, is a known quantity. In England and Wales, if a good and arguable case can be made out that an alleged fraudster deceived a plaintiff into handing him £1 million, the Court will grant Mareva-injunctive relief enjoining all relevant parties under its jurisdiction from permitting the transfer of assets legally or beneficially owned by the alleged fraudster, wheresoever in the world those assets may be located.

Regrettably, under the law governing the grant of pre-judgment, pre-emptive relief freezing bank accounts (saisses conservatoires) or land (hypothéques judiciare provisoire), such a juridical nexus, between a deceitful or conspiratorial tort-feasor, on the one hand, and a victim on the other, is very difficult to discern. The analytical framework employed in France for establishing the availability of extraordinary remedies (such as ex parte asset freezing orders) is creditor-debtor  oriented, in contrast to fraudster-victim. That having been said, however, the term creditor, enjoys a broader meaning in both the English and French languages than merely the benign lender of financial capital who advances money to a borrower on the strength of a contract of loan. A creditor can be any manner of person who comes to be owed money, including the victim of a breach of a fiduciary duty, or, say, the commission of the tort of deceit. In France, a person who comes to be owed money may seek a remedy to conserve assets belonging to the obligor, moveable or immovable, tangible or intangible, if it can be demonstrated both that (a) there is peril with respect to recovery of the obligation and (b) the debt, or the obligation to pay money, appears to be justified in principle (créance paraissant fondée en son principe) (Article 67 of Law 91-650 of 9 July 1991). To show peril, it is sufficient to show that there is a risk of removal of the alleged debtor's assets. As for the claim, it must appear to be based on solid grounds (i.e., to be supported by documentary evidence).

To peremptorily freeze assets in France, one must first establish the appropriate legal nexus. This is both critical and particularly difficult, given the relatively formalized nature of legal analysis in that land. Much of French law is codified into statute. There is not much emphasis paid in France to judge-inspired case law as a font for precedent and the establishment of principle. This position is slowly changing. This notwithstanding, there are problems.

A case in point. One of the authors acted as the solicitor for the plaintiff in Desmond Henry Annala and Sugarbaby Inc v Salim A El-Hage and six others in the Supreme Court of the Commonwealth of the Bahamas (1994, Nº 629), and collaterally, before Le Tribunal de Grande Instance de Paris. In this case, a bank was formed in Nassau by the primary Defendant and others. This bank issued US$6 million of certificates of deposit to its depositors. The Plaintiffs held US$1.2 million of such certificates. All of the proceeds of the bank's deposits were removed from the Bahamas by the bank's promoter, without adequate documentation showing where the funds were invested. The bank failed. It had no apparent assets. The Plaintiffs asserted that the bank had been set up to steal all of the proceeds of the deposits and, therefore, the bank was itself an instrument of a fraud perpetrated by the promoters. The promoter-owners lived in Paris, and maintained deposits in accounts at three banks in that city. In connection with these proceedings, on 14 June 1994, a worldwide Mareva Injunction was granted ex parte by the Honorable Justice Joan Sawyer of the Supreme Court of the Commonwealth of the Bahamas. This Mareva Injunction contained a tailor- made, extraordinary declaratory order, declaring that ...each of the Plaintiffs has a strong case against each of the Defendants on the merits. The Court had thus provisionally found that, under the proper law of the apparent tort of deceit (Bahamian law), sufficient proofs were adduced through affidavits to have established a strong jural nexus or relation between each of the Plaintiffs and each of the Defendants.

Two days later, on 16 June 1994, one of the authors, on behalf of the Plaintiffs, and through local Counsel in Paris, appeared before Judge de L'Execution A Baland. Madame Justice Baland declared that:

Given the declaration of ... Ie Juge de la Cour Supreme du Commonwealth des Bahamas... to the effect that each of the Plaintiffs had a strong case against each of the Defendants on the merits, Madame Justice Baland declared that a sufficient jural relation had been established to permit the grant of a saisie conservatoire freezing any sum of money standing to the credit of the defendants at their three banks in Paris up to the French Franc equivalent of US$2,045,881.99. This case is illustrative of the need in serious fraud matters for the victim's recovery team to think multi-jurisdictionally and multi-dimensionally. The relief sought in Annala v El-Hage in the Bahamas had but one purpose. The Plaintiffs knew that the Defendants had been successful in sequestering and moving all of their assets out of the Bahamas well before the world-wide Mareva injunction was granted by the Court on 14 June 1994. Accordingly, the extraordinary and urgent relief obtained in the Bahamas was sought purely for the purpose of securing a judicial declaration suitable for meeting the near impossible burden imposed upon the victim of an apparent fraud in search of a saisie conservatoire (a French freezing order) over a bank account in Paris. Such requires the showing of a solid jural link between the victim of a fraud and the protagonist under circumstances where the actual primary obligor was a defunct Bahamian bank that had been used as the primary font of deceitful representations to the Plaintiffs to induce them to part with their money, in return for certificates of deposit of no value. If the litigation had been commenced in France alone, the only party that would be made the subject of a saisie conservatoire, based on the facts of Annala v El- Hage, was this penurious, defunct, insolvent Bahamian bank, as it was the only entity which, through the documents issued by that bank, had a clear jural relationship with the Plaintiffs. It took the assistance of a court in the Bahamas to expand the universe of parties to that critical jural relation, to thus include the fraudster, his wife and children, and his confederates.

Asset Arrest – Switzerland.

Switzerland has two separate systems of law, federal and cantonal. The country consists of 26 cantons, or independent jurisdictions. The federal and cantonal systems distinguish between two types of interim relief. Under federal law, a plaintiff may obtain an arrest to enjoin the removal, dissipation or disposal of almost any type of asset in order to secure the successful enforcement of an awarded or future money judgment.

In contrast, injunctions aimed at securing the enforceability of non-monetary claims are mainly governed by cantonal law. To preserve the status quo in such proceedings the plaintiff may apply for conservatory measures – such as a prohibitory order enjoining the sale of subject property pending the outcome of proceedings.

The attachment procedure is governed for the most part by the Federal Act on Debt Collection and Bankruptcy of 11 April 1989 (as amended January 1, 1997). An attachment is granted by the court with jurisdiction at the place where the assets are situated. The application is made by the creditor, ex-parte, who must show the following:

• Prima facie evidence of an enforceable claim which is not already secured. (If the debtor has no permanent domicile in Switzerland the claim does not necessarily have to be due).
  
  

• Proof in relation to ownership of the assets.
  
  

• One of the following state of affairs exists.
  
  

• Debtor has no fixed domicile.
  
  

• Debtor moves or transfers assets with intent to evade an obligation.
  
  

• Debtor's presence in Switzerland is only transient.
  
  

• Debtor has no domicile in Switzerland and his claim is based on a final court decision or acknowledgement of debt or has a sufficient link with Switzerland.
  
  

• The creditor has received a final certificate of loss against the debtor.
  
  

In summary, in order to obtain an interlocutory injunction or asset arrest, the plaintiff must show prima facie evidence of the facts which justify his action and that he would, in the absence of such relief being granted, suffer a disadvantage or harm that cannot be easily remedied by a final judgment. In theory, the test, it would seem, is thus not as stringent as that applied in Commonwealth jurisdictions (namely that danger of irreparable harm must be show in English common law jurisdictions). In practice though, the standard applied by the Swiss, judiciary comes closer to that required in commonwealth jurisdictions than commentators would have us believe.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.