The mareva injunction

Introduction

The Mareva Injunction, which, at its appearance in 1975 was considered a powerful, extreme tool, unique to English law, has now become commonplace, sought as a matter of procedure, in most Commonwealth countries.

In the context of banks and banking law, Mareva Injunctions is an order that negates the banker's duty to pay or transfer funds as per the instructions of the customer. More generally, it is an interlocutory order granted ancillary to a substantive claim involving money, that seeks to prevent a defendant from rending a decree against him worthless by removing his assets from the jurisdiction of the court. Also known as the ‘freezing order', the injunction has changed and evolved vastly from the earliest cases, and has grown into a general jurisdiction enabling the courts to grant the relief in circumstances very different from what was initially envisaged.

This paper deals with three aspects related to the injunction; Part I traces the history of its origin and its entry into various Common Law jurisdictions. Part II describes the requirements an application for the injunction needs to fulfill. Part III deals with the injunctions effect on third parties.

The Evolution Of The Mareva Injunction

In English law, until 1975, when the Mareva Injunction first appeared, the scope of interim relief was very restricted. In contrast, other jurisdictions - especially those following the civil law system - offered a wide range of provisional protective measures. In particular, the English system did not allow arrest or freezing of assets before or during trial for ensuring that the Plaintiff's debt was satisfied. Towards the latter half of the 20th century, however, the fact that one could not “get an injunction to restrain a man who is alleged to be a debtor from parting with his property” created scope for rampant abuse. Foreign companies, to evade possible adverse judgments, often removed their assets from the Court's jurisdiction before trial. As a result, the plaintiff was left holding nothing more than an ‘empty judgment'. This kind of exploitation of the system was frequently seen in cases involving ‘one-ship' companies.

The solution to this problem was finally offered by the English courts in 1975, in two successive cases, the Court of Appeal granted injunctions that restrained the defendant from taking his assets out of the Court's jurisdiction pending trial. The second of these, Mareva Compania Naviera SA v International Bulkcarriers, gave the injunction its name.

This clearly, was a time when the Courts felt an expansion in their jurisdiction was required. Further evidence of this is a simultaneous introduction of the Anton Piller Order - or an order compelling a defendant to permit the plaintiff into his premises to look for and collect evidence which he would otherwise have destroyed. Originating in the English Commercial courts, the injunction initially intended to prevent a foreign defendant from removing his assets out of the English Court's jurisdiction. The scope of the injunction, however, was soon widened tremendously to include a wide range of defendants covering many different situations. From covering only money deposited in banks, the scope of the injunction was, at an early stage, extended to include all other forms of property.

Further, till as late as 1979 Mareva injunctions were held to be applicable only against non-resident defendants. While this limitation was often criticized, it was not removed till much later. In 1980, the injunction was granted against a non-resident present in England, and subsequently, in a different case, the jurisdiction was extended to a resident defendant. In Rahman v Abu-Taha, the Court of Appeal approved this expansion of jurisdiction.

Another aspect of the injunction that has undergone change is the extent of the restraint. At its first appearance, it sought to restrain the defendants from ‘removing or disposing out of the jurisdiction any of their assets within the jurisdiction'. Subsequently, it evolved into what is now the customary form of the Mareva injunction - the freezing order. “This restrains the defendant from removing from the jurisdiction, or otherwise disposing of or dealing with, any of his assets within the jurisdiction including and in particular [a certain specified asset] save in so far as such assets exceed in value the sum of [the plaintiff's claim] until trial or further order” In Ninemia Maritime Corp v. Trave Schiffahrtsgesellschaft mbH & Co, the judge said that, “I believe that it is no longer either necessary or sufficient (if it ever was) to establish that there is a risk that the assets will be taken abroad…”

While the jurisdictional basis of the Mareva injunction under English law is provided by the Parliament vide Supreme Court Act I98I section 37(3), in other Commonwealth countries it remains a matter of controversy. In India, however, the Civil Procedure Code, 1908, provides the jurisdiction to the Courts vide Order XXXVIII, Rule 5 to grant such remedy. It states that:

‘if, at any stage of a suit, the court is satisfied…that the defendant, with intent to obstruct or delay the execution of any decree that may be passed against him, is about to dispose of, or remove from the Court's jurisdiction, the whole or any part of his property, the court may direct the defendant… to furnish security in a specified sum, and place at the court's disposal the property or equivalent value…as may be sufficient to satisfy the decree'.

Even jurisdictions where the Mareva injunction lacks statutory backing, have found ways to incorporate the remedy into their ordinary civil proceedings. An analysis of the jurisprudence in the area demonstrates that the acquisition of the jurisdiction to grant the Mareva injunction is considered very useful.

Criteria For Grant Of The Mareva Injunction

Essentially an interlocutory injunction, the elements that a plaintiff needs to establish in order to get a Mareva order are along the lines of any interim injunction - i.e. a prima facie case, balance of convenience and irreparable injury. Over the years, the criteria have been clearly laid down and include: (1) a cause of action must exist at the time the order is to be granted, and the plaintiff must demonstrate a good arguable case; (2) the defendant must have assets within the jurisdiction of the court; (3) the balance of convenience must be in favour of the plaintiff being granted the injunction; (4) the plaintiff must establish that the defendant lacks probity and that there is a real risk of dissipation of assets; and (5) there has been no delay in applying for the injunction. These were enlisted in the matter of Dynasty Rangers v. SBSK Plantations.

An important question that a study of the jurisprudence of the Mareva injunction raises is - how does one determine ‘real risk of dissipation of assets'? Courts have taken divergent views on this, and there is no clear answer.

One view is that some concrete evidence to show that the defendant intends to evade the consequences of an adverse decree by removing his assets has to be provided. Then there are judgments that state that merely showing ‘a risk of disposal of assets which has the effect of frustrating the plaintiff in his attempt to recover the fruits of a judgment he is likely to obtain against the defendant' would be sufficient.

Some courts have gone further and stated that risk of dissipation of assets can be gauged from the nature of allegation and past behavior of the defendant. In the words of Steven Gee:

“Good grounds for alleging that the defendant has been dishonest is relevant. Dishonesty is not essential to the exercise of the jurisdiction and there is no need to show an intention to dissipate assets. But if there is a good arguable case in support of an allegation that the defendant has acted fraudulently or dishonestly (e.g. been implicated in an ingenious scheme for the misappropriation of funds belonging to the claimant), or with an unacceptably low standard of commercial morality giving rise to a feeling of uneasiness about the defendant, then it is often unnecessary for there to be any further specific evidence on risk of dissipation for the court to be entitled to take the view that there is a sufficient risk to justify granting Mareva relief.”

The British courts have held that solid evidence of risk of dissipating assets is required, but prior conduct and unreliability is good evidence to show this risk. In Ninemia Maritime Corp v. Trave Schiffahrtsgesellschaft mbH & Co, the judge said that, “It is not enough for the plaintiff to assert that the assets will be dissipated. He must demonstrate this by solid evidence… It may consist of direct evidence that the defendant has previously acted in a way which shows that his probity is not to be relied on… Precisely what form the evidence may take will depend on the particular circumstances of the case. But the evidence must always be there…”

In Patterson v. BTR Engineering the New Zealand court held that the nature of allegation has a bearing on determining risk of dissipating assets. If it is some dishonesty/fraud that is alleged against the defendant, then ‘it can be inferred that the defendant is not the sort of person who would, unless restrained, preserve his assets intact so that they might be available to his judgment creditor'. Similarly, in Ang Chee Huat v. Thomas Joseph Engelbach, the judge of a Malaysian court held, “…Having considered the evidence, I am of the view that the conduct of the appellant in this matter is lacking in probity and honesty. In the circumstances, I conclude that there is a real risk that the assets of the appellant will dissipate should the respondent succeed at the trial…”

Effect On Third Parties

In Z Ltd v. A-Z, the court got the opportunity to consider the impact Mareva Injunctions had on third parties. Kerr LJ, speaking for the Court of Appeal laid down detailed guidelines for deciding on the liability of a third party for violating a Mareva Injunction. In the case, the plaintiff was a foreign company that had an office in London and was fraudulently induced to transfer large sums of money to London for purchase of goods that were never intended to be supplied. The money received was divided between various bank accounts in London and the plaintiff, on discovering the fraud, took steps to recover the same. Mareva injunction was granted against the defendant, and while the substantive issues had been settled, an appeal was heard on the persistence of the banks so that the effect of the injunction on third parties - i.e. the banks - could be clarified. Six principles emerged from the appeal, viz are follows: (1) A third party that has been given notice of the injunction, if he knowingly assists in a breach of the order, will be guilty of contempt of court, irrespective of the defendant's knowledge of the injunction. A bank must, therefore, dishonor any cheque or refuse any transfer of money once it has received notice of the injunction; (2) If a bank is under an obligation to another party to make payments on behalf of the defendant, for instance under a bank guarantee, the bank may violate the injunction and debit the defendant's account irrespective of notice. The bank must, however, as far as possible, consider withdrawal of such facilities from the defendant; (3) the plaintiff must indemnify any reasonable expense incurred by a third party in complying with the injunction, and is required to give the court an undertaking to this effect. These costs can, however, be recovered from the defendant at trial, if the plaintiff is successful; (4) It is the duty of the plaintiff to give the third party such information as is needed to allow it to comply with the injunction. If the plaintiff does not have sufficient information and is unable to identify the assets of the defendant, he may request the third party to conduct a search. The cost for this, however, is to be borne by the plaintiff; (5) the injunction restrains the defendant from dealing with his assests only to the extent of the claim. In very exceptional cases alone can the entire estate of the defendant be frozen; (6) Provisions for the day to day living expenses of the defendant may be made, expressly in the injunction or otherwise.

The Mareva injunction was never intended to change English laws of insolvency and, therefore, the Mareva injunction does not prohibit a defendant from repaying legitimate business debts from his frozen assets. The defendant will, however, have to first apply to the court seeking an order to empower him to make such payments and establish that there is no other source from which can pay the debts.

These cases, however, do not comment on the effect of the injunction on third parties that are outside of the jurisdiction of the court. A third party that is resident within the jurisdiction of the Court will clearly be in contempt of court if he knowingly undermines a Mareva injunction. It has been assumed in the above case and other similar cases that an offshore branch of an English bank that is within the jurisdiction of the English courts, would be equally bound by the injunction once the main branch (in England) has been notified of the same. This, however, creates a category of third parties with respect to whom the position is not clear - i.e. banks that have no presence within the jurisdiction of the court granting the injunction. If the injunction does bind such third parties, then it would clearly be an example of a court exercising transnational jurisdiction. Strangely, however, courts have not restrained from granting such injunctions. Their position is controlled by a proviso that the courts are expected to insert into the extrajurisdictional injunctions that was formulated by Lord Donaldson in Derby Nos. 3 &4 as follows: “Provided that, in so far as this order purports to have any extraterritorial effect, no person ["person" includes companies] shall be affected thereby or concerned with the terms thereof until it shall be declared enforceable or be enforced by a foreign court and then it shall only affect them to the extent of such declaration or enforcement unless they are: (a) a person to whom this order is addressed or an officer of or an agent appointed by a power of attorney of such a person or (b) persons who are subject to the jurisdiction of this court and (i) have been given written notice of this order at their residence or place of business within the jurisdiction, and (ii) are able to prevent acts or omissions outside the jurisdiction of this court which assist in the breach of the terms of this order.”

Conclusion

The Mareva injunction has come a long way since its inception in 1975. It is a powerful tool, and in many ways has given courts wide powers to ensure their judgment is not rendered worthless. Over time, the injunction has evolved from being a simple prohibition on foreign defendants from removing their assets from the court's jurisdiction to a broad relief enforceable against any defendant - irrespective of where he is resident or where his assets are - prohibiting him from, in any way, dealing with or attempting to dissipate his assets.

While it has made the legal machinery stronger and ensures realistic remedy, there are numerous issues with the injunction, especially those related to jurisdiction. It, in essence, permits even a non-party to a suit, who does not even reside within the jurisdiction of the court, to be held in contempt of that court's jurisdiction. Courts should, therefore, exercise extreme discretion while granting such relief and ensure that principles of natural justice are not violated. No doubt the Mareva injunciton is useful, however, it should not be allowed to develop contrary to basic, well established, principles of law.

Bibliography:

Andrews, N.H., ‘Freezing Foreign Assets by Mareva Injunctions', The Cambridge Law Journal, Vol. 48, No. 2 (Jul., 1989), pp. 199-201, available online at http://www.jstor.org/stable/4507283, last visited on 6th April, 2010.

Capper, David , ‘Worldwide Mareva Injunctions', The Modern Law Review, Vol. 54, No. 3 (May, 1991), pp. 329-348 available online at http://www.jstor.org/stable/1096926, last visited on 6th April, 2010.

Gee, Steven, Commercial Injunctions, 5th edn, Sweet & Maxwell, London, 2004.

Harpum, Charles and David Lloyd Jones, ‘Mareva - Toward the Unknown Region', Oxford Journal of Legal Studies, Vol. 3, No. 1 (Spring, 1983), pp. 136-146, available online at http://www.jstor.org/stable/764331, last visited on 6th April, 2010.

Harpum, Charles and David Lloyd Jones, ‘Mareva--Toward the Unknown Region', Oxford Journal of Legal Studies, Vol. 3, No. 1 (Spring, 1983), pp. 136-146, available online at http://www.jstor.org/stable/764331, last visited on 6th April, 2010.

McLachlan, Campbell, ‘Transnational Applications of Mareva Injunctions and Anton Piller Orders', The International and Comparative Law Quarterly, Vol. 36, No. 3 (Jul., 1987), pp. 669- 679, available online at http://www.jstor.org/stable/760488, last visited on 7th April, 2010.

Tannan, M.L., Tannan's Banking Law & Practice in India, 20th edn., India Law House, 2003, New Delhi.

Table Of Cases:

Allen v Jambo Holdings Ltd [(1980) i WLR 1252 (CA)]

Ang Chee Huat v. Thomas Joseph Engelbach [(1995) 2 CLJ 893]

Angel Bell Case [(1981) QB 65]

Anton Piller v. Manufacturing Processes [(1976) Ch. 55]

Bank Bumiputra Malaysia Bhd. V. Lorrain [(1985) 2 M.L.J. 236]

Chartered Bank v Daklouche [(1980) i WLR 107 (CA)]

Derby Nos. 3 &4 [(1989) 2 W.L.R. 412]

Dynasty Rangers v. SBSK Plantations [(2001) 7 CLJ 168]

Mareva Compania Naviera SA v International Bulkcarriers [(1975) 2 Lloyd's Rep 509 (CA)]

Ninemia Maritime Corp v. Trave Schiffahrtsgesellschaft mbH & Co [(1984) 1 All ER 398]

Nippon Yusen Kaisha v. Karageorgis [(1975) 1 W.L.R. 1093]

Patterson v. BTR Engineering [(1989-1990) 18 NSWLR 319]

Petowa Jaya Sdn Bhd v. Binaan Nasional Sdn Bhd. [(1987) 1 LNS 57]

Rahman v Abu-Taha [(I980) I WLR 1268]

Rasu Maritima v Pertamina [(1978) QB 644 (CA)]

Robinson v. Pickering [(1881) 16 Ch.D 660]

The Agrabele Case [(1979) 2 Lloyd's Rep 117]

V-C in Barclay-Johnson v Yuill [(1980) i WLR 1259]

Z Ltd v. A-Z [(1982) 2 WLR 288]



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