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Thursday
Jul282016

Lincoln Caylor: What's the difference between notification injunctions and freezing orders

In Holyoake v Candy, a recent decision of the Chancery Division of the High Court of England and Wales, the court considered an application for a “notification injunction.”

Instead of preventing the Candy brothers from transferring assets outright, the proposed notification injunction required the Candy brothers to notify Holyoake within three days of transferring assets. The judge granted Holyoake’s application, writing that if the court can prevent a defendant from disposing of his or her assets altogether, then plainly it can grant a less intrusive notification injunction.

As background: To prevent defendants from flaunting the judicial process, common law courts will grant “Mareva injunctions” or “freezing orders” in the early stages of litigation. As the name suggests, freezing orders “freeze” a defendant’s assets, preventing significant transfers until the litigation is complete, minimizing the risk that the
defendant dissipates his or her assets and frustrates the plaintiff’s ability to recover damages.

The decision in Holyoake includes many interesting comments concerning notification and freezing orders, three of which I will highlight here.

First, in order to obtain a notification injunction, the judge wrote that a plaintiff may not need to demonstrate as great a risk of dissipation as would be required to secure a freezing order.

Second, complex offshore corporate structures are not, of themselves, evidence of a risk of dissipation, according to the judgment.

Third, the court found that defendants should be considered to owe claimants a duty not to dissipate assets.

Let’s take a closer look at each of these.

To obtain a freezing injunction, English courts require that a claimant demonstrates (1) a good arguable case, whereas Canadian courts require a strong prima facie case, (2) a risk that the defendant will frustrate the judicial process by dissipating his or her assets, and (3) that the balance of convenience favours granting the injunction.

For the purposes of obtaining a notification injunction, the judge in Holyoake wrote that “what is needed to justify a freezing injunction in terms of the merits of the substantive claim is also needed to justify a notification injunction.” The judge added that notification injunctions are less intrusive than a freezing order, writing “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.”

In Holyoake, the judge deferred considering the balance of convenience to a subsequent hearing.

Given the court’s recognition that notification injunctions are less intrusive than freezing orders, it would presumably be easier to persuade a court that the balance of convenience favours granting a notification order.

The relaxed requirements to obtain a notification order make it a tool best suited for claimants with strong cases against two classes of defendants -- those who display a lesser degree of risk than would be required to obtain a freezing injunction and those peculiarly vulnerable to freezing orders such that the balance of convenience would weigh against the claimant.

In considering whether Holyoake had demonstrated a sufficient degree of risk to justify making a notification order, the court considered the complex and opaque corporate network through which the Candy brothers conducted business.

The judge wrote that “the mere fact that a defendant holds their assets or businesses, or some of them, offshore through offshore structures is not in itself evidence of a risk of dissipation.”

The judge also wrote that “the mere fact that there are a large number of companies is not by itself anything unusual.”

While recognizing that complex offshore corporate structures can be used “for entirely proper and bona fide purposes,” the court conceded that “such structures do lend themselves to being abused.”

Thus, the Candys’ complex and opaque web of offshore corporations, while “not in itself grounds for inferring a risk of dissipation… [was] capable of being regarded as contributing to the risk if there is other material on which to infer such a risk.”

When considering the court’s jurisdiction to grant freezing and notification orders, the judge in this case wrote that “a defendant must be regarded as owing an obligation to a claimant not to dissipate his assets for the purpose of, or with the effect of, rendering any judgment that may be given liable to be one that goes unsatisfied.” The judge reasoned that because English law requires evidence of an actual or threatened violation of a legal or equitable right to grant an injunction, freezing and notification injunctions must be premised on a duty not to dissipate.

The judge’s comments are qualified by a recognition that “a debtor is not obliged to keep his assets intact to meet a possible claim by a claimant and can continue to spend them in the ordinary course of business or on his ordinary living expenses.”  In other words, the defendant’s obligation to the claimant is not to ensure their claim, if successful, will be satisfied in full, but rather to abstain from taking steps to thwart the judicial process.

There is no doubt that courts, to ensure respect for their processes, would enjoin conduct likely to undermine the administration of justice. What is unique about this judge’s analysis is conceptualizing the injunction as flowing from an obligation between the parties, rather than as between the defendant and the court.

The citation for Holyoake v Candy is [2016] EWHC 9780 (CH), 2016 WL 0165267.

The author gratefully acknowledges the assistance of Christopher Gibson in preparing this post.

____

Lincoln Caylor is a partner at Bennett Jones in Toronto. He practices commercial litigation and is internationally recognized for leading asset tracing investigations and pursuing asset recovery litigation and enforcement actions in prominent, high-value international financial frauds and other economic crimes. He's the only Toronto member of ICC FraudNet, a worldwide network of selected lawyers specialized in asset tracing and recovery. In 2012, he was presented with the Queen Elizabeth II Diamond Jubilee Medal for his contributions to Canada.

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