From time to time, where a party becomes aware that there is a risk that assets of another party to a dispute may be disposed of, it is necessary to apply to the Court for a freezing order.
A freezing order is an order of the Court which prohibits a party from disposing of, dealing with or diminishing the value of the assets that are the subject of the order.
A party seeking a freezing order must show the Court that:
- there is a good arguable case against the defendant;
- there is a reasonable risk of the dissipation of the assets; and
- it is just and convenient to grant the order.
In a recent case Rigby Cooke Lawyers acted for a company which purchased a block of land to be developed into apartments, however the land was sold to a third party from under the purchaser’s nose.
The case is notable for two reasons. First, the damages sought by a party to a failed sale of land are usually restricted to the difference in the purchase price under the respective contracts of sale. In this case our client, as the proposed developer of the land, has sued for the profits he has lost from the failed development (a much larger sum). Second, this was an application made on notice to the other party’s solicitors. Typically freezing order applications are brought without the other party being put on notice, therefore denying them the opportunity to dispose of the assets before the application is heard.
The parties had executed a Heads of Agreement designed to preserve our client’s rights in relation to the purchase of the land until the parties formally entered into a formal Contract of Sale. The vendor then sold the land to another purchaser. Rigby Cooke Lawyers put the vendor on notice that it was our client’s intention to issue a proceeding against the vendor seeking an injunction restraining the sale to a third party, alternatively damages for breach of the Heads of Agreement.
The need for urgent injunctive relief was avoided because the solicitors for the vendor initially agreed to retain the proceeds of the sale of the land in their trust account. However, they later gave notice that they intended to release a significant portion of the proceeds to the vendor. Our client was concerned that once these proceeds were released, they would become unrecoverable in the event the damages claim against the vendor was successful. There was a real risk that the funds would be sent off shore, depriving our client of the fruits of any judgment.
Rigby Cooke Lawyers made an application for a freezing order to prevent the vendor’s solicitors from releasing the net proceeds of sale.
Good arguable case
The vendor’s solicitors had offered to retain a sum which was greater than the difference in the purchase price under the two contracts of sale, however our client’s claim was for lost profits it would have derived by developing the land, a much larger sum.
In order to satisfy the Court that there was a good arguable case for the lost development profits, our client had to show special circumstances existed. It was argued that the special circumstances were:
- the directors of the respective companies had worked towards developing the land for a number of years (meaning the vendor had knowledge of our client’s intention and ability to develop the land);
- the vendor knew that our client had obtained finance and the agreement of an investor for the purchase of the land;
- our client had been incorporated for the purposes of the purchase and development of the land; and
- another entity managed by an officer of our client had sought and obtained the planning permit for the land.
In response, the vendor argued that:
- the market value of the land as determined by the ultimate sale incorporated the additional value that the planning permit attached to the land;
- it was speculative whether the development of the land by our client would actually be profitable; and
- the evidence of the potential value of the land (which was given as an estimate by one of our client’s directors) was weak.
The Court was satisfied that our client had a reasonably strong case for a breach of contract and that special circumstances existed which would allow our client to claim damages for the lost profits from the development of the land.
Risk of dissipation
In finding that there was a risk of the dissipation of the proceeds of sale, the Court highlighted the following factors in determining that a risk existed:
- the vendor was not continuing to trade;
- a director of the vendor had indicated he intended to invest the proceeds (though not immediately);
- notice had been given that the bulk of the proceeds were to be released to the vendor;
- a director of the vendor appeared to be under financial stress; and
- the vendor had exhibited conduct said to be ‘commercially ruthless’.
Balance of convenience
Noting that the vendor company was not a trading company and that there were no immediate plans to invest the proceeds, the Court found that the balance of convenience favoured the making of a freezing order. An order was made freezing the proceeds of sale of the land, with provision for the parties to reach agreement for the proceeds to be invested so as to lessen the impact of the freezing order.
The effectiveness of a freezing order cannot be underestimated. In the above case, the parties soon progressed to having settlement discussions as to the best way forward. If you have any questions, Rigby Cooke’s commercial litigation and dispute resolution team would happily assist to answer any questions you may have.
|Disclaimer: This publication contains comments of a general nature only and is provided as an information service. It is not intended to be relied upon as, nor is it a substitute for specific professional advice. No responsibility can be accepted by Rigby Cooke Lawyers or the authors for loss occasioned to any person doing anything as a result of any material in this publication.
Liability limited by a scheme approved under Professional Standards Legislation.
©2016 Rigby Cooke Lawyers