Insolvency practitioners – the dos and don'ts when applying for a freezing order in an insolvency situation
The Court of Appeal’s judgment in Hunt v Ubhi  EWCA Civ 417 provides useful guidance for insolvency practitioners seeking to obtain freezing orders. In particular, the decision highlights the importance of ensuring the adequacy of the cross-undertaking in damages provided in support of a freezing order application and the importance of making full and frank disclosure in the application.
- Burden of proof – if seeking to offer less than an unlimited cross-undertaking in damages in support of a freezing order application, the burden of proof will be on the applicant insolvency practitioner to demonstrate why that is appropriate.
- Sufficiency – if the amount of the cross-undertaking is going to be limited to certain assets (e.g. the estate of the entity in liquidation), insolvency practitioners should "stress test" the undertaking to ensure that, in actual fact, those assets are likely to be available and of sufficient worth.
- Insurance – investigate the possibility of obtaining insurance when providing a cross-undertaking in damages and provide evidential support if this is not feasible.
- Indemnity – be prepared to demonstrate to the Court that you have asked the petitioning creditors if they are able to provide an indemnity (limited or otherwise) or an adequate explanation as to why one is not appropriate.
- Disclosure – ensure the duty of full and frank disclosure has been complied with.
A winding up petition was presented against Black Capital by some of its creditors who collectively claimed to be owed £18m. The petitioning creditors were said to be in the minority both in terms of the number of creditors and the amount owed.
The petition was presented under article 7 Insolvent Partnerships Order 1994 on the basis that Black Capital was a partnership between Mr Ubhi and Mr Patel.
The petition was granted, and Mr Hunt was appointed as provisional liquidator.
Following his appointment, Mr Hunt obtained a freezing order against Mr Ubhi and Mr Patel and gave a restricted form of cross-undertaking in damages. The cross-undertaking was limited to “the amount of monies and the net realizable value of the unpledged assets of Black Capital (in provisional liquidation) taken into the custody or under the control of the Applicant in the course of the liquidation less the costs, expenses or other disbursements of the liquidation.”
At the return date for the freezing injunction, the judge decided to continue the freezing orders originally made.
The Court of Appeal overturned this decision, essentially finding that insufficient evidence had been presented to justify departing from the default position that the cross-undertaking in damages should be unlimited. Accordingly, the judge in the High Court was wrong to have accepted a limited cross-undertaking in damages.
JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev  EWCA Civ 139,  1 WLR 160 (Pugachev) is considered “the leading authority on the provision of cross-undertakings in damages”.
That case confirms:
- the Court has discretionary authority to determine the level of the cross-undertaking in damages that the applicant seeking an interim injunction is obliged to provide;
- however the "default position" is that the applicant is required to give an unlimited cross-undertaking in damages; and
- there are limited exceptions to the "default position" for example:
- where the applicant is a law enforcement agency; or
- where the applicant has no personal interest in the litigation and is bringing the action on behalf of others.
Questions decided by the Court of Appeal
- Was the Judge wrong to accept a limited cross-undertaking from Mr Hunt and had there been full and frank disclosure?
- Should the Judge have set aside the freezing order and refused further relief on account of breaches of the duty of full and frank disclosure?
- The burden is on the applicant to show why it is appropriate to depart from the “default position” of an unlimited cross-undertaking in damages.
- The fact that an applicant is a liquidator does not of itself excuse the absence of an unlimited cross-undertaking i.e. the “default position” still applies to insolvency practitioners.
- There was insufficient evidence presented to justify departing from the default position. Mr Hunt’s argument that he was acting in the interests of all creditors, of which the petitioners were a minority, did not constitute sufficient evidence. In reaching this decision the Court of Appeal appears to have been influenced by the fact that the liquidator had not asked the petitioning creditors to provide an indemnity or explored whether insurance could be obtained.
- The applicant’s submissions at first instance – which suggested that it was "usual” for liquidators to give cross-undertakings in damages that are limited to the assets in the estate – were inadequate and misleading. Though, in the circumstances, the Court of Appeal held that the inadequacy of the submissions would not in of itself be enough to discharge the freezing order.
This article was co-authored by trainee Isobel Lewis.