Global freezing orders – the long arm of the law against international investors

RELATED KNOWLEDGE

• Freezing orders in Australia to assist foreign proceedings – guidance for inhouse counsel

Freezing orders (also known as Mareva orders or asset preservation orders) aim to prevent the frustration or inhibition of the court’s process by seeking to meet a danger that a judgment or prospective judgment of the court will be wholly or partly unsatisfied (eg. by a person removing or dissipating their assets). They are therefore normally obtained on an ex parte basis, without notice to the respondent, before service of the originating process, in order to limit the prospect of dissipation or removal once the respondent becomes aware of application. This kind of interlocutory order is only available for money claims, as distinct from proprietary claims, but can secure a broad range of personal assets such as bank accounts, real property, share portfolios. term deposits, motor vehicles, valuables etc. Once an order is made, such assets cannot be sold, leased, mortgaged or otherwise dealt with unless the orders specifically allow for it. Since it provides an exceptional remedy (a nuclear weapon in a litigator's arsenal), it is one that the courts do not grant lightly:  

Superior courts have inherent power to make orders that they determine to be appropriate to prevent the abuse or frustration of their process in relation to matters coming within their jurisdiction. This inherent power has also been reinforced by court rules and Practice Directions from about 2006, which set out the basis on which a party can seek a freezing order to assist with foreign proceedings. See for example: Federal Court Rules Order 25A; rule 2, Uniform Civil Procedure Rules (UCPR) 2005 (NSW) – rule 25.11; NSW Practice Note SC Gen 14; UCPR 1999 (Qld) rule 260A(1), Qld Supreme and District Court Practice Direction 1 of 2007;

Q: Are Worldwide Freezing Orders limited to circumstances where there is proof of a realistic possibility of enforcement? A: NO

In a recent decision of the High Court of Australia (Deputy Commissioner of Taxation v Huang [2021] HCA 43), the court was asked to determine whether the power of the Federal Court of Australia to make an order restraining a person from disposing of, dealing with or diminishing the value of assets, including assets located in or outside Australia could only be exercised if there was proof of a realistic possibility of enforcement of a judgment debt against the person's assets in each foreign jurisdiction to which the proposed order relates.

The case involved a tax audit by the Deputy Commissioner of Taxation who issued an unpaid assessment of $141 million (including a shortfall penalty) against Mr and Mrs Huang – two former residents of Australia who are citizens of the People's Republic of China.

Due to the large amount of unpaid tax, a worldwide freezing order against all of Mr Huang's assets was made on an ex parte interim basis by a single judge of the Federal Court, . The interim order required Mr Huang to refrain from disposing of, dealing with or diminishing the value of his Australian assets up to the amount claimed in the originating application and his assets outside Australia to the extent that the value of Mr Huang's unencumbered Australian assets was less than the amount claimed in the originating application. In assessing the risk/danger that the Deputy Commissioner's prospective judgment against Mr Huang would be wholly or partly unsatisfied because his assets might be removed from Australia or disposed of, dealt with or diminished in value, Justice Katzmann made reference to seven reasons to support the order:

• Mr Huang's tax liability of over $140 million was "considerable".
• The results of the tax audit indicated an intention to avoid paying tax by grossly understating income.
• Mr Huang was a Chinese national, currently overseas, without an Australian visa who, since November 2018, had taken a number of steps towards severing his ties to Australia.
• Mr Huang's Australian assets did not seem to be enough to satisfy the tax liability.
• Mr Huang was likely to be a person of substantial wealth and has significant business interests in the PRC, including Hong Kong, that allowed him to easily move assets between jurisdictions. These circumstances demonstrated that Mr Huang had both a motive and the means to dissipate his Australian assets.
• Mr Huang had already taken steps to divest himself of his interest in Australian companies and trusts. Although he transferred money overseas before becoming aware that he was under investigation by the Australian Taxation Office, the amount of money transferred increased dramatically after the audit began.
• The recent issue of the tax assessment notices increased the likelihood of dissipation.

When the Deputy Commissioner applied for summary judgment against Mr Huang and a Worldwide Freezing Order against him until further order, he did not oppose the freezing order to the extent that it related to his assets in Australia, nor did he object to filing an affidavit disclosing his assets in Australia. His primary submissions addressed whether the order should operate in respect of his assets outside Australia and, in particular, assets located in Hong Kong and the PRC. The primary judge concluded that the preservation of the integrity or efficacy of any process ultimately enforceable by the Court was important and maintained the worldwide freezing order, noting that "it is not impossible that the [Deputy Commissioner] may be able to take enforcement action against [Mr Huang] …".

Mr Huang appealed to the Full Federal Court, who held that while a freezing order could be established, it could only be applied to Australian assets, because there was no realistic possibility of enforcing a judgement against Huang's assets in the foreign jurisdictions. If assets were beyond the reach of the Court's enforcement processes, then the removal or disposition of those assets could not realistically frustrate or inhibit the Court's process.

The Deputy Commissioner then appealed to the High Court. The appeal did not dispute the Full Court's finding that there is presently no realistic possibility that the Deputy Commissioner's judgment would be enforceable in the PRC or Hong Kong – partly because the PRC and Hong Kong have each entered a reservation to the Convention on Mutual Administrative Assistance in Tax Matters, to the effect that they "shall not provide assistance in the recovery of tax claims, or in conservancy measures, for all taxes".

The High Court (by majority) overturned the decision of the Full Federal Court, and held that a worldwide freezing order could apply to all of Mr Huang's assets, including those outside of Australia. (This is consistent with the longstanding position in the UK – see for example Babanaft International Co SA v Bassante [1990] 1 All ER 433 and Republic of Haiti v Duvalier [1990] 1 QB 202).

In reaching its decision, the plurality of the High Court noted that:

• Mr Huang, having submitted to the Federal Court's jurisdiction, is required to comply with its process and orders;
• As a superior court, the Federal Court is entitled to make a worldwide freezing order where there is a threat of the court's processes being frustrated.
• The ability to make a worldwide freezing order is an implied power of the Federal Court and there is no limitation on such a power. Further, FCR 7.32(2) explicitly contemplates that a freezing order within r 7.32 may apply to assets located outside Australia and it is not to be read as subject to r 7.35. Indeed, r 7.35 extends the scope of r 7.32, including by confirming the rule's application to cases that may have otherwise been in doubt, namely where there is a "prospective" cause of action and in relation to processes of a foreign court.
• The danger required by r 7.32 does not necessarily need to be proved because of one or more of the circumstances set out in r 7.35(4) because r 7.35(4) does not cover the field.
• A freezing order is a personal claim rather than a proprietary claim. The court has authority to make orders against a person to prevent them removing or dissipating their assets. The in personam nature of the court's power is not subject to whether there are assets in the court's jurisdiction (although that might be relevant to the discretionary exercise of those powers).
• Limiting the scope of issuing a freezing order would only result in future instances where assets could be moved to foreign jurisdictions to avoid being subject to a freezing order. Unaffected by a Worldwide Freezing Order, a defendant would be free to move assets surreptitiously to a jurisdiction not covered by the order. This would also substantially defeat the utility of the power in r 7.33 to make an order ancillary to a freezing order for the purpose of eliciting information relating to assets relevant to the freezing order because such information could only concern assets that have been identified.
• A worldwide freezing order is a power that is recognised in several foreign jurisdictions. Indeed, in Broad Idea International Ltd v Convoy Collateral Ltd, the Privy Council recently observed that the granting of worldwide freezing orders has "long since ceased to be exceptional".
• While the likely utility of a freezing order is undoubtedly relevant to the exercise of the court's discretion to grant the order and a court may decline to make a freezing order because the defendant is outside the jurisdiction and is likely to ignore the order – a court should nevertheless "not be deterred by a defendant's contumelious behaviour from making an order that is otherwise appropriate".