Freezing Orders in Hong Kong

October 2017

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54 Freezing Orders Hong Kong

Freezing Orders have developed into an important weapon in a claimant’s armoury, especially when pursuing a defendant which does not own a vessel or vessels that might be susceptible to arrest. Over the years, the English Courts (and those of other common law jurisdictions) have developed a set of basic requirements for the granting of a Freezing Order. If these can be fulfilled the Court will order that the defendant’s assets (usually funds in a bank account) be frozen up to a set amount. This can even extend to assets held outside of the jurisdiction (a so-called “Worldwide Freezing Order”).

In many cases, the most difficult criterion for a claimant to fulfil to obtain a Freezing Order, is that requiring demonstration of a real risk of the defendant’s assets being dissipated. This aspect was examined in a recent judgment handed down in the Hong Kong Court of First Instance.

Crete Maritime Corporation (“Crete”) had commenced London arbitration against Emirates Shipping Line (“Emirates”), claiming US$265,149.43, plus interest and costs, for breach of a time charter due to unpaid hire and early termination. Emirates had counter-claimed for underperformance of the vessel, which led to the early termination. The Court had already granted a Mareva Injunction (the historical term for a Freezing Order, still used in Hong Kong, and named after the claimants in the 1975 English case where such an order was first made) against Emirates’ Hong Kong assets at an ex parte hearing (i.e. where only the claimants had attended and made submissions), but Emirates, once notified of the injunction, subsequently challenged it on the grounds that there existed no real risk of dissipation of assets.

The judge noted that Crete’s case on the dissipation aspect rested entirely on the allegation that Emirates was “an entity of unacceptably low commercial morality”, a phrase coined in an earlier Hong Kong case (Honsaico Trading Ltd v Hong Yiah Seng Co Ltd [1990] 1 HKLR 235). Claimants seeking Freezing Orders often face difficulty obtaining direct evidence of a risk of dissipation, so often inferential evidence needs to be put forward and this can be achieved by demonstrating the defendant is an entity of low commercial morality. In that regard one may consider a spectrum of general corporate conduct, from clear cases of fraud to sharp commercial practice. Where fraudulent conduct can be shown that would tend towards the inference of a real risk of dissipation, whereas sharp practices, whilst undesirable, would not in isolation give rise to such an inference.

Crete tried to support its case that Emirates demonstrated unacceptably low commercial morality by asserting that:

1. Emirates had no proper ground for refusing to make hire instalments;
2. The underperformance dispute was entirely unmeritorious and a poor excuse not to honour the charter terms; and
3. The ultimate early redelivery was based on this “poor excuse”.

Unsurprisingly, the judge did not find these assertions came close to demonstrating the necessary low commercial morality. He said that even looking at Crete’s case in the best possible light, one could only say that Emirates was trying to get out of a bargain through untenable excuses and while “Regrettably, such commercial behaviour is not uncommon … to say that a party with that behaviour should have his assets frozen because there is a real risk of dissipation is not supported by common sense.” Furthermore, when one looked at evidence submitted by Emirates it seemed that there was a genuine belief that the vessel had underperformed. This, combined with the fact that Emirates is a substantial international company with a number of offices, 250 staff and an annual turnover of about US$280 million, led the judge to conclude that “the suggestion [it] would dissipate its assets to evade an award of US$0.5 million [was] untenable.” He therefore discharged the injunction and awarded Emirates its costs.

The judgment also helpfully outlines further factors to be considered when looking at the risk of dissipation of assets. These derive from the judgment in Eastman Chemical Ltd v Heyro Chemical Co Ltd (No 2) [2012] 3 HKLRD 307:

A. The Court should not be too ready to infer a real risk of dissipation from the defendant’s conduct or commercial morality
B. There must be “solid evidence” of the risk of dissipation and the standard of proof is relatively high
C. The fact that a defendant may be short of money to pay its debt is not itself a good reason for a Freezing Order, as the purpose of the Order is not to put the claimant in a better position than other creditors
D. Merely fearing that there will no assets against which to enforce a judgment or award is insufficient. The dissipation must be shown to be with an intention to defeat the claimant’s claim, or be otherwise “improper”
E. The fact that the defendant might not have been forthcoming with information of its financial position is irrelevant
F. A failure by the defendant to give assurances of retention of assets to settle a debt, when the claimant has no legal right to such assurances, is also irrelevant
G. The court will not make an order if there are no identifiable assets to be frozen
H. The test is, however, an objective one and there is no need for the claimant to prove a subjective intention on the part of the defendant to dissipate assets to defeat the claim.

This case provides a good illustration of the fact that there is no automatic right to a Freezing Order simply by identifying assets of the defendant and asserting an arguable claim (which in many jurisdictions is all that is needed to arrest a vessel). Whilst Freezing Orders can be an effective means of obtaining security, many applicants will be unable to surmount the hurdle of having to demonstrate to the court that there is a real risk of dissipation of assets by the defendant.

Article by Rohan Bray
Director
Hong Kong Office