Freezing Orders: third party creditors

Freezing Orders: third party creditors

The courts will be sympathetic to third parties who are seeking to enforce their security in respect of property subject to a freezing order.  The expert commercial and shipping lawyers at top Bahamas law firm ParrisWhittaker have many years’ experience advising clients on shipping disputes including security over assets.

In an important case1, the High Court in the UK imposed a freezing order in respect of three vessels owned by the defendants.  However, a secured creditor asked the court to amend its terms so that it could enforce its rights against assets that were subject to the freezing order. 

What’s the background?

Judgment was originally entered against the defendants for a liquidated some exceeding US$2.5 million, and a later judgment assessed further damages at over €1.3m against the first defendant and a further sum of over US$400,000 against all four defendants jointly and severally.  A freezing order was then made restraining them from dealing with certain Van Dutch boats or hulls (over which the claimant also claimed a charge); restraining dealings with shares in the first defendant (again over which the claimant also claimed a charge or pre-emption rights); and imposing further general restraint on dealing with the assets of any of the respondents in the normal way.

In addition, the order contained various disclosure orders to complied with by all the defendants.  The freezing order led to substantial satellite litigation.

The claimant, who had the benefit of the freezing order, argued that the four defendants were jointly and severally liable on a substantial bridging loan.

A third party, TCA Global Credit Master Fund LP (TCA), asked the claimant to consent to it being able to enforce its security - a debenture - that had been given by the second defendant who had failed to make loan repayments.  The claimant did not give his consent, arguing that uncertainties as to the intellectual property of the assets should first be resolved because if the second defendant did not own the assets – TCA would have no rights over them.

TCA therefore applied for the freezing order to be varied to the effect that nothing in the order should restrict it from enforcing its rights as a secured creditor pursuant to the debenture.  TCA was understandably wary of the terms of the freezing order, so as not to breach the terms. 

The claimant’s arguments included that if the order was varied, this would be seen as validation of TCA’s title.

What did the court decide?

The court took what it called the “principled approach” where, “in a normal security enforcement situation …. a secured creditor does not need a variation of a freezing order”.

The court decided that in the absence of authority, principle does not stand in the way of a secured creditor enforcing its security over charged assets caught by a freezing order.  Freezing orders are to prevent a defendant from dissipating its assets improperly in the face of a claim, not to give security to the creditor, and nor does it operate to affect the genuine right of third parties over those assets.

However, the court said that if a third party’s acts fell to be treated as acts of the defendants then the third party may be caught by the order. Therefore, a third party with security over assets subject to the freezing order would not need to obtain permission to exercise that security because the exercise of disposal rights under that security would not be an act prohibited by the order – so a variation or release of the freezing order would not normally be needed.

The court ruled that TCA was entitled to the relief sought (though a variation may not actually be needed).  It said that if it later emerged that the second defendant did not have title to the assets, TCA commits a wrong against the second defendant and this would be TCA’s to bear.  It is not the purpose of the freezing order to protect the second defendant from that.

In addition, whilst freezing orders are capable of ‘holding the ring’ as between the relevant parties, there is no ring to be held so far as the secured creditors are concerned.

The ruling serves as a useful reminder of the purpose of freezing orders, and what it is not – particularly in the context of creditors, to whom the court will be sympathetic.

How can we help?

We advise and represent commercial, shipping and maritime clients with their commercial contracts, debts and other disputes. If you have a potential claim or need to defend a claim against you, or need expert assistance in relation to a freezing order, contact the expert commercial and shipping lawyers at ParrisWhittaker for urgent advice and representation.

1 Kevin Taylor v Van Dutch Marine Holding Ltd and others 2017 EWHC 636 (Ch)