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Insight Oriented Towards Analytical Study Of Freezing Order

This paper reviews the concept of Mareva Injunction, the evolution of the writ of Mareva Injunction and how is applied throughout the globe. Mareva Injunction is also known as freezing orders; this is because the fundamental principle of this writ is to freeze the assets of the defendant. These orders are interlocutory orders and are even granted ex-parte, as they are passed to restrain the defendant from dissipating the assets.

This writ plays a very important role while dealing with civil cases, as it proves to be providing equitable justice to both the parties. It is an aspect which developed in the late twentieth century and is used as a tool to restrict the defendant from disposing the assets. There is still a grey patch as to the effect on the third parties while use this writ, however some courts have given their views which are discussed in the paper.

Different courts have given different views; the paper discusses the views of British courts, Canadian courts, New-Zeeland courts and Indian courts. The paper has been prepared after thorough study of The Code of Civil Procedure, 1908 and how the Indian courts have interpreted this writ. Mareva injunction is very useful as it safeguards the plaintiff from suffering injustice as; it restrains the defendant from dissipation of their assets. It turns out to something new and with the help on Anton Piller order it becomes an exceptional writ to ride on the way to provide justice to both the parties.

Introduction
The Mareva Injunction, which, at its appearance in 1975 and is considered a powerful, extreme tool, unique to English law, has now become commonplace, sought as a matter of procedure, in most Commonwealth countries.

Mareva Injunctions is an order that negates the banker's duty to pay or transfer funds as per the instructions of the customer. A temporary injunction that freezes the assets of a party pending further order or final resolution by the Court, so named after the case which allowed the remedy.

More generally, it is an interlocutory order granted ancillary to substantive claim involving money, that seeks to prevent a defendant from rendering a decree that will make his assets vanish from the jurisdiction of the court. It is commonly known as freezing order, the injunction has developed a lot since its inception and is been used as a tool to safeguard the petitioner/plaintiff/appellant from suffering injustice, in different circumstances.

The Evolution of The Mareva Injunction

In English law, until 1975, when the Mareva Injunction first appeared, the scope of interim relief was very restricted and rigid. In contrast the civil jurisdiction offered a wide range of provisional protective measures. In particular, the English system did not allow arrest or freezing of assets before or during trial for ensuring that the Plaintiff's debt was satisfied as it was still unknown who was the wrong doer. Towards the latter half of the 20th century, however, the fact that one could not get an injunction from a man who was alleged to be the debtor was creating abuse of the powers.

The solution to this problem was finally offered by the English courts in 1975, the Court of Appeal granted injunctions that restricted the defendant from taking his assets out of the Court's jurisdiction until the trial is commenced. The name MarevaInjunction was derived from the case of MarevaCompania Naviera SA v International Bulkcarriers[1], in which Lord Denning being the chief author of the judgement granted injunction to the petitioners restraining the defendants. This clearly gave an indication to the courts to expand their jurisdiction and look into the aspects of interlocutory orders to be of some consequence.

Till 1979, the Mareva injunction was only applicable against the defendants who were no residents to that court's jurisdiction. While this limitation in the context of using this jurisdiction exclusively in the cases of non-residents was criticised. However, in the year 1980 in the case of Rahman v Abu-Taha[2] there was a new interpretation and for the first time Mareva injunction was exercised on a defendant who was the resident of that jurisdiction.

The most important aspect that has evolved from the inception of Mareva Injunction is that, earlier the orders passed by the courts were only to bring the assets of the defendant in the jurisdiction of the court from outside; the evolution that took place is what we today derive from Mareva Injunction i.e. freezing order.

This evolution restrains the defendant from removing the assets from the jurisdiction, or otherwise disposing of or dealing with, any of his assets within or out of the jurisdiction of the courts including and in particular a certain specified asset, save in so far as such assets exceed in value the sum of the plaintiff's claimuntil trial or further order.

In Ninemia Maritime Corp v. Trave Schiffahrtsgesellschaftmb H & Co[3], the Judge said that, I believe that it is no longer either necessary or sufficient (if it ever was) to establish that there is a risk that the assets will be taken abroad…

While the jurisdictional basis of the Mareva injunction under English law is provided by the Parliament vide Supreme Court Act I98I (earlier known as The Senior Courts Act,1981) section 37(3), in other Commonwealth countries there is still a lot of controversy as to the matter of Mareva Injunction.

In India, however, the Civil Procedure Code, 1908, provides the jurisdiction to the Courts vide Order XXXVIII, Rule 5 to grant such remedy.

It states that:
if, at any stage of a suit, the court is satisfied…that the defendant, with intent to obstruct or delay the execution of any decree that may be passed against him, is about to dispose of, or remove from the Court's jurisdiction, the whole or any part of his property, the court may direct the defendant… to furnish security in a specified sum, and place at the court's disposal the property or equivalent value…as may be sufficient to satisfy the decree.

Even jurisdictions where the Mareva injunction lacks statutory backing, one can easily trace that the courts have adopted and interpreted the writ to freeze the assets of the defendant when there is a prima facie default. An analysis of the jurisprudence in the area demonstrates that the acquisition of the jurisdiction to grant the Mareva injunction is considered to be a tool very useful to deal with the defaulters.

Criteria for Granting the Mareva Injunction

Essentially an interlocutory injunction, the basic meaning of interlocutory injunction orders, the granting of perpetual Injunctions is regulated by the Specific Relief Act, while temporary or, as they are sometimes called, interlocutory Injunctions, which are simply intended to preserve the status quo pending the decision, and which may be granted at any period of a suit, the purpose of which is t maintain peace and order in the society.

There are certain elements that a plaintiff needs to establish in order to get a Mareva order are along the lines of any interim injunction - i.e. a prima facie case, balance of convenience and irreparable injury.

Over the years, the criteria have been clearly laid down and include:
  1. a cause of action must exist at the time the order is to be granted, and the plaintiff must demonstrate a good arguable case;
  2. the defendant must have assets within the jurisdiction of the court;
  3. the balance of convenience must be in favour of the plaintiff being granted the injunction;
  4. the plaintiff must establish that the defendant lacks probity and that there is a real risk of dissipation of assets; and
  5. there has been no delay in applying for the injunction.
These were enlisted in the matter of Dynasty Rangers v. SBSK Plantations.[4]

An important question while studying the jurisprudence of the Mareva injunction raises is - how does one determine ‘real risk of debauchery of assets'? Courts have taken divergent views on this, and there is no clear answer.

One view is that some concrete evidence to be shown by the plaintiffthat the defendant intends to bypass the consequences of an adverse decree by removing his assets has to be provided. Then there are judgments that state that merely showing by providing some evidence that there is a risk of disposal of assets which has the effect of frustrating the plaintiff in his attempt to recover the fruits of a judgment then the plaintiff is likely to obtain an interlocutory injunction order against the defendant.

Some courts have gone further and stated that risk of dissipation of assets can even be gauged from the nature of allegation and past behaviour of the defendant. In the words of Steven Gee:
Good grounds for alleging that the defendant has been dishonest are relevant. Dishonesty is not essential to the exercise of the jurisdiction and there is no need to show an intention to dissipate assets.

But if there is a good arguable case in support of an allegation that the defendant has acted fraudulently or dishonestly (e.g. been implicated in an ingenious scheme for the misappropriation of funds belonging to the claimant), or with an unacceptably low standard of commercial morality giving rise to a feeling of uneasiness about the defendant, then it is often unnecessary for there to be any further specific evidence on risk of dissipation for the court to be entitled to take the view that there is a sufficient risk to justify granting Mareva relief.[5]

The British courts have held that even the past behaviour of the defendant which shows unreliability is also a solid evidence to pass an interlocutory order. However, in several cases it was also held that the plaintiff cannot seek the remedy of Mareva Injunction only on the basis that the assets will dissipate, rather has to demonstrate certain things which will prove certain aspects and assist the courts to pass freezing orders.

In Patterson v. BTR Engineering [6]the New Zealand court held that the nature of allegation has to have solid bearings to prove and have a prima facie evidence that the assets will dissipate. If it is found the plea of the plaintiff is dishonest or untrue and the defendant has a clean past with no evidence showing that the defendant will make the assets dissipate then the court on its discretion even refrain from passing the freezing orders.

Similarly, in Ang Chee Huat v. Thomas Joseph Engelbach [7], the judge of a Malaysian court held, …Having considered the evidence, I am of the view that the conduct of the appellant in this matter is lacking in probity and honesty. In the circumstances, I conclude that there is a real risk that the assets of the appellant will dissipate should the respondent succeed at the trial…

Effect on Third Parties

In Z ltd. v. A-Z[8],the first case where the courts got an opportunity to indulge with the effect of freezing orders on third part. Kerr J., while speaking for the court of appeal laid down certain provision that violated the rights of third party. In the case, the plaintiff was a foreign company that came to London and brought a lot of purchase of goods, took the money and never intended to supply the goods to the persons entitled to have them .the money which they received was divided into different bank accounts, as soon as the plaintiff discovered about the fraud, he started to take certain steps. An appeal was preferred and Mareva injucntion was granted against the defendants and the effect on the third party - i.e. the banks - was clarified.

Six principles emerged from the appeal, viz are follows:

  1. a third party that has been given notice of the injunction, if he knowingly assists in a breach of the order, will be guilty of contempt of court, irrespective of the defendant's knowledge of the injunction. A bank must, therefore, dishonour any cheque or refuse any transfer of money once it has received notice of the injunction;
     
  2. if a bank is under an obligation to another party to make payments on behalf of the defendant, for instance under a bank guarantee, the bank may violate the injunction and debit the defendant's account irrespective of notice. The bank must, however, as far as possible, consider withdrawal of such facilities from the defendant;
     
  3. the plaintiff must indemnify any reasonable expense incurred by a third party in complying with the injunction, and are required to give the court an undertaking to this effect. These costs can, however, be recovered from the defendant at trial, if the plaintiff is successful;
     
  4. it is the duty of the plaintiff to give the third party such information as is needed to allow it to comply with the injunction. If the plaintiff does not have sufficient information and is unable to identify the assets of the defendant, he may request the third party to conduct a search. The cost for this, however, is to be borne by the plaintiff;
     
  5. the injunction restrains the defendant from dealing with his assets only to the extent of the claim. In very exceptional cases alone can the entire estate of the defendant be frozen;
     
  6. provisions for the day to day living expenses of the defendant may be made, expressly in the injunction or otherwise.

The concept of Mareva injunction has never intended to change the course of law or the legislature; therefore, one is always allowed to repay the debts from the frozen assets, if those debts are legitimate. For this defendant although has to seek prior permission of the or else the transaction will be held void or irregular in the eyes of law.

These cases, do not specifically talk about the effect on the banks which are out of the jurisdiction of the court. A third party that is resident within the jurisdiction of the court and if s/he knowingly undermines a Mareva injunction then will be liable in contempt of court. These cases make it complicated as they have neither affirmed nor denied the position of the banks outside the jurisdiction of courts. If such is the case where the courts do not bind the third parties then it will be a transitional jurisdiction.

The point concerning the extra jurisdictional provisos was formulated by Lord Donaldson in derby nos. 3 &4 as follows:

provided that, in so far as this order purports to have any extraterritorial effect, no person [person includes companies] shall be affected thereby or concerned with the terms thereof until it shall be declared enforceable or be enforced by a foreign court and then it shall only affect them to the extent of such declaration or enforcement unless they are:
  1. a person to whom this order is addressed or an officer of or an agent appointed by a power of attorney of such a person or
     
  2. persons who are subject to the jurisdiction of this court and

    (i) have been given written notice of this order at their residence or place of business within the jurisdiction, and
    (ii) are able to prevent acts or omissions outside the jurisdiction of this court which assist in the breach of the terms of this order.[9]

Case Comments:
From the above we understand that often defendant hides assets out of the Court's jurisdiction as soon as the claim is served to frustrate enforcement of the judgment. The Mareva injunctions are typically obtained without notice to the other side (ex-parte) as to tip the defendant off would likely cause the prompt movement of the relevant assets before the Court could issue its injunction, thereby insulating the defendant from contempt.

Foreign courts view:

In Aetna Financial Services Ltd. v. Feigelman[10], Canada's Supreme Court stated that:

The gist of the Mareva injunctionis the right to freeze eligible assets when found within the jurisdiction, wherever the defendant may reside, providing, of course, there is a cause between the plaintiff and the defendant which is justifiable in the courts of England. However, unless there is a genuine risk of disappearance of assets, either inside or outside the jurisdiction, the injunction will not issue.

The Canadian supreme court in this particular case went on to affirm Mareva injunction against the defendant, and also gave a view as to how the usage of Mareva has evolved. From the above stated case gave a very clear view that not only the English courts but the foreign courts are also using the Mareva Injunction as a tool to freeze assets of the defendant.


The Ontario Court of Appeal, Canada in a 1995 case, R v Consolidated Fastfrate Transport Inc.[11], provided this comprehensive summary:

A Mareva injunction is an exceptional form of interlocutory relief designed to freeze the assets of the defendant, in appropriate circumstances, pending determination of the plaintiff's claim. Execution, on the other hand, refers to the process by which a successful plaintiff may enforce a judgment.

It encompasses those remedies available to a creditor after a court has declared that a sum of money is immediately due and owing by a debtor. A party obtaining a Mareva injunction is required to give an undertaking to pay damages in the event that any are suffered due to the defendant's inability to deal with the property. This is an irrelevant consideration insofar as an execution is concerned.

A Mareva injunction is a discretionary equitable remedy. It will only be granted to a person who has clean hands.The granting of an injunction also involves weighing the balance of convenience to the parties. It will be issued in circumstances where the plaintiff demonstrates that he will suffer irreparable harm if the injunction is not issued.

Fairness to both sides is a consideration. By contrast, an execution can be issued as of right once a judgment has been obtained against the defendant. If the plaintiff has a valid judgment, considerations such as fairness and the clean hands of the plaintiff are irrelevant. A Mareva injunction operates in personam. In other words, the injunction is directed toward the defendant in person and not to the defendant's assets.

From the above narrated case it becomes very clear how the foreign courts have adopted the task of freezing assets of the defendants, also how the interlocutory orders to pass an order of Mareva injunction. Also, how it is an exceptional aspect that is considered under the purview of temporary or interlocutory injunctions. The astonishing thing that the courts observed was that the party seeking Mareva injunction has to always come with clean hands and should not fall within the purview of the legal maxim, he who comes to equity should come with clean hands. The most important aspect is that the procedure of the courts passing such an order is also laid.

Application of Mareva Injunction by Indian Courts:

  1. Mareva injunction does not have a basis in CPC
    The court introduced Mareva injunction in India through its inherent powers recognized under section 151 CPC. These inherent powers cannot be exercised when a remedy has already been provided in the CPC for a particular situation. These powers cannot be in conflict with existing provisions and nullify them.
     
  2. Attachment before judgment under Order 38 Rule 5 CPC
    Order 38, Rule 5 of CPC provides for attachment of property before passing of a judgment. This attachment has a wide scope. It can be granted in any proceeding other than suits. Additionally, courts also have the power to issue such an order against a third party and properties situated outside its jurisdiction.

    The court can use this power under Order 38 Rule 5, CPC at any time when it thinks that the defendant, with the intention of obstructing or delaying the decision, is about to sell or move his property outside the jurisdiction of the Court. It is also meant to prevent a court's decision from becoming pointless. Since it is a drastic step, it must be used in exceptional circumstances and only if the plaintiff has made a clear case.

    The provision has its own inherent safeguards. The intention of the defendant has to be proved by the plaintiff by using positive evidence and not by mere allegations. If the order is given without following procedure, the attachment is void.]If the defendant appears, the court must give him a chance to be heard. Once the defendant produces security or appears to show cause, the order must be set aside.
     
  3. Indian Courts cannot use Inherent Powers to grant Mareva injunction
    Indian Courts have admitted that attachment under Order 38 Rule 5 CPC and Mareva injunction are similar to each other. As it can be seen from the above discussion, both the remedies have a similar purpose and are granted on similar grounds. However, they lead to different results. Order 38 Rule 5 CPC leads to attachment of property and Mareva injunction results in an injunction. An attachment imposes a lien on the property whereas, an injunction does not.
As stated above, inherent powers of the Court cannot be exercised when the CPC already has a solution for a particular situation. Order 38 Rule 5 CPC and Mareva injunction are for the same purpose, i.e., preventing the defendant from selling the property and making the judgment useless. CPC in such cases directs the courts to attach the property and adhere to the conditions laid down in Order 38 Rule 5 CPC. The courts cannot ignore this provision and grant an injunction against the defendant. By adopting this approach, the courts are neglecting the law laid down by the Legislature and making its own law. Therefore, Mareva injunction does not have a basis in CPC and cannot be granted by using inherent powers.


Supreme Court of India:

  1. Bharat Aluminium Co vs. Kaiser Aluminium Technical[12]
    Lord Diplock observed that it is conceded that the cargo owners' claim for damages for breach of contract does not of itself fall within any of the sub-rules of Order 11, Rule 1(1); nor does their claim for damages for tort. It is further observed that what is contended by the counsel for the cargo-owners is that if the action is nevertheless allowed to proceed, it will support a claim for Mareva injunction restraining the ship owners from disposing of their assets within the jurisdiction until judgment and payment of the damages awarded thereby; and that this of itself is sufficient to bring the case within sub-rule (i) which empowers the High Court to give leave for service of its process on persons outside the jurisdictions.
     
  2. Sundaram Finance Ltd vs. m/s Nepc India[13]
    The power to grant an interim injunction under Section 44 of the Act extends to the granting of a Mareva injunction in appropriate cases. It may also include granting an interim mandatory injunction, although the court will be slow to grant an injunction which provides a remedy of essentially the same kind as is ultimately being sought from the arbitral tribunal. In our opinion this view correctly represents the position in law, namely, that even before the commencement of arbitral proceedings the Court can grant interim relief. The said provision contains the same principle which underlies Section 9 of the 1996 Act.
     
  3. Iridium India Telecom Limited vs. Motorola Inc. Corporation [14]
    A plaintiff has what appears to be an indisputable claim against a defendant resident outside the jurisdiction, but with assets within the jurisdiction which he could easily remove, and which the Court is satisfied are liable to be removed unless an injunction is granted.
    This was found necessary because otherwise it would enable the defendants to ignore the plaintiff's claim in the courts of a country and snap his fingers at any judgment which may be given against him. Therefore, the Court justified the grant of such an order on an ex parte basis. The Court eventually held that such an injunction ought to be granted where the plaintiff has a good arguable case and to induce the defendants to give security.
     

Delhi High Court Approach

Rite Approach v. Rosoborne Expor[15]t is a case in point. By virtue of a contract of agency between Rite Approach and Kazan Helicopters Ltd. (subsequently taken over by Rosoborne Export), the former was claiming commission from Rosoborne Export for the sale of six helicopters by a third entity to the Government of India. FI was sought against Government to restrain it from making full payment for six helicopters and to prevent the respondent from dealing with it. The respondent being a Russian state-owned company has resources to satisfy any decree in favour of the plaintiff making it difficult to seek an injunction order against it.

Although the bench found no merit in the appeal due to Government of India not being a party to the arbitration agreement between the appellant and the respondent and various other reasons, its observations with regard to FI and Attachment Before Judgment are noteworthy and shape the jurisprudence on this subject matter.

The judgment departs from the Bombay approach holding that although FI is different from Attachment Before Judgment, the former has to satisfy the statutory tests under Order 38 Rule 5. In other words, pleading for FI necessarily requires the party to meet the rigours of Order 38 Rule 5 of the Code. It is respectfully submitted that this approach ignores the difference between a form of injunction and Attachment Before Judgment, both governed by different provisions under the Code.

Equitable Jurisdiction

Section 151 of the Code saves the inherent power of the courts to make such orders as may be necessary for the ends of justice. The Code is not exhaustive as the legislature is incapable of contemplating all the possible eventualities that may arise in future litigation. It is only when there is no clear provision in the Code that the inherent jurisdiction can be invoked.

Book:
The granting of a Mareva injunction does not give the plaintiff property, nor does it give the plaintiff a lien on the defendant's property. It gives no priority to the potential creditor over other claimants before or after judgment, nor does it affect the laws relating to insolvency. The defendant is restrained from disposing of his assets in the sense that to do so will constitute contempt of court, but the injunction does not affect the defendant's power to dispose of his assets.[16]

It was clearly stated by the author that how Mareva injunction only freezes the assets and does not give the right to the plaintiff to occupy the defendant's property. It only restricts the defendant from disposing off his assets and securing them from getting dissipated. The Mareva Injunction has no role to as to change the structure or the form of any law which may give rise to party the right to seek Mareva Injunction.

Anton Piller Order:

This an order compelling a defendant to permit the plaintiff into his premises to look for and collect evidence which he would otherwise have destroyed. Originating in the English Commercial courts, the injunction initially intended to prevent a foreign defendant from removing his assets out of the English Court's jurisdiction. The scope of the injunction, however, was soon widened tremendously to include a wide range of defendants covering many different situations. From covering only money deposited in banks, the scope of the injunction was, at an early stage, extended to include all other forms of property.

Conclusion
Marevainjunction is a powerful tool and has come a long way since its inception in 1975, also have been able to expand the jurisdiction of the courts to certain extent. There has been a great evolution as to the jurisdiction as earlier it was restricted to the jurisdiction and the resident defendant only, however, during the passage of time it can be issued against any defendant and also in any jurisdiction.

While this has enabled and ensured smooth the working of the court's machinery to certain extent, however, there are certain glitches as to the jurisdiction of the third parties. The essence of this can be that even a party who is not a party to the suit can be held liable as to contempt of court. Therefore, it is the responsibility of the courts not to violate their principles of natural justice and not to grant interlocutory orders like Mareva injunction until and unless there is or are prima facie evidence in that particular case.

End-Notes:
  1. [(1975) 2 Lloyd's Rep 509 (CA)]
  2. [(I980) I WLR 1268]
  3. [(1984) 1 All ER 398]
  4. [(2001) 7 CLJ 168]
  5. Gee, Steven, Commercial Injunctions, 5th edn, Sweet & Maxwell, London, 2004
  6. [(1989-1990) 18 NSWLR 319]
  7. [(1995) 2 CLJ 893]
  8. [(1982) 2 wlr 288]
  9. [(1982) 2 wlr 288]
  10. 1985 1 SCR 2
  11. 40 CPC 3d 160
  12. (2012) 9 SCC 648
  13. (1997) 11 SCC 201
  14. 2005 (1) CTC 304 (SC)
  15. AIR 2007 Del 145
  16. Gaskell, Debattista and Swanson, Chorley and Giles' Shipping Law, 8th Edition, 1987, Pitman Publishing, London

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