An End Of An Era For Freezing Orders As We Know Them?

In a recent decision, the Federal Court considered the impracticality of freezing orders in the modern world of online banking and accordingly, removed a freezing order in exchange for a formal commitment not to dispose of assets

On 29 November 2024, in Nova Supply Chain Finance Pty Limited v Active Capital Reinsurance Limited (a company incorporated in Barbados) [2024] FCA 1398 (“Nova”), the Federal Court made orders for the removal of freezing orders made a week earlier. The decision highlights how in some cases freezing orders are entirely incompatible with the modern world of online banking.

What is a freezing order?

A freezing order (also known as a Mareva injunction) is an order that bans a party from disposing of assets, which includes transferring funds from bank accounts. The purpose of a freezing order is to prevent the party being sued from disposing of assets  to avoid paying its creditors. In most cases, there is an exception allowing for the payment of ordinary living and business expenses and legal costs. This is because the party being sued still needs to live and engage lawyers pending the outcome of the court case.

Usually, when the Court makes a freezing order, the applicant will provide a copy of the order to the banks. The banks will then put an immediate stop to all transactions. In many cases, the banks will only allow a transaction upon personal attendance at a branch with sufficient documentation to establish that the proposed transaction is permitted. This can make it extremely difficult to pay for ordinary living and business expenses, which are permitted by the freezing order.

When will the Court grant a freezing order?

To obtain a freezing order, an applicant must generally show that it has a good arguable case before the Court and there is a danger that any judgment it obtains will be unsatisfied because the person being sued may dispose of its assets. In cases involving fraud and other serious misconduct, it is presumed that the person being sued will not preserve its assets: Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319. In which case, the applicant need only show that it has a good arguable case before the Court.

When will freezing orders be removed?

A freezing order will usually come as a surprise to the party against whom the freezing order is made. This is because applications are usually made on an urgent basis and the applicant need not notify the other party of the application (this is known as an “ex parte” hearing). So, the other party will generally only find out about the freezing order after it is made by the Court.

This is what happened in Nova. However, soon after the freezing orders were made, an application was made to the Court to remove them. The application was made on the basis that with the bank accounts frozen, insurance premiums could not be passed on to insurers (one of the parties was an insurance broker) and payments to staff, suppliers and landlords could not be made. Accordingly, it was alleged that if the freezing orders remained, they would lead to  company insolvency and personal bankruptcy. This argument found favour with his Honour Jackman J who made this observation:

“… The issue which arises is that, in the modern world of automated and electronic banking transactions with minimal (or no) human involvement on the part of the bank, it is not easy for banks to ascertain whether a withdrawal is permitted by a freezing order. As a result, many banks which are served with a freezing order simply block their customer’s account, … requiring the customer to attend personally at a branch of the bank after having sent an email 1–2 business days beforehand enclosing sufficient supporting documents to establish to the satisfaction of the bank’s staff that a proposed withdrawal falls within one of the exceptions to the freezing order.”

In exchange for removing the freezing order, the parties against whom the freezing orders were made offered to provide a formal undertaking to the Court not to dispose of or deal with any assets except for the purposes of paying their ordinary living expenses, legal expenses and business expenses. This was enough to convince the Court to remove the freezing order.

Conclusion

The Nova case highlights how in some cases freezing orders are unworkable in the modern world of online banking, particularly where the banks are provided with a copy of the freezing order. It will be interesting to see whether the solution offered by Jackman J at the end of the judgment will be followed in subsequent cases:

“… in my view, consideration should be given in future cases to making an order to the effect that the freezing order is not to be served on, or notified to, any bank or financial institution which is not a party to the order without the leave of the Court. The applicant for leave would then have to justify the proposed course of action in the particular circumstances of the case, and demonstrate how the full scope of the order (particularly the exceptions pertaining to ordinary living and business expenses and reasonable legal expenses) would be likely to operate in practical terms. On reflection, that is the course which I should have taken when this matter first came before me on an urgent ex parte hearing.”

A freezing order can have dire consequences for the party against whom the freezing order is made. If you have been served with a freezing order or feel that you may need to obtain one to ensure that the party you are suing will not dispose of its assets, the best thing to do is to seek legal advice at an early stage. For assistance, please contact Ben Hemsworth on (02) 9923 2321 or email us at enquiries@somervillelegal.com.au.