Mareva Injunctions – Substance and Form

Recent cases in Hong Kong highlight a need to exercise care when applying for a mareva (freezing assets) injunction before trial.

Summary

Recent cases in Hong Kong highlight a need to exercise care when applying for a mareva (freezing assets) injunction before trial.  A failure to do so can result in (among other things) the injunction being discharged and not necessarily re-granted, with costs against the plaintiff.

A mareva injunction is usually initially obtained in the absence of the defendant, on the basis that this is justified on account of a need for secrecy.  As a result, a mareva injunction comes with in-built protections for the defendant. For example, a mareva injunction is a sophisticated but prescribed form under Practice Direction 11.2 of the High Court of Hong Kong.(1) Any material deviation from this form which is not brought to the attention of the judge granting the initial order comes with a real risk that the injunction will be discharged at a later court hearing (often called a 'return date').

We are seeing a trend in judges at first instance holding plaintiffs to an increasingly demanding duty to be full and frank with the court on an application for a mareva. Obtaining a mareva injunction is one thing; extending its validity beyond a defendant's application to discharge or vary is another.

Background

A Mareva injunction is basically a court order that (among other things) freezes a defendant's assets up to a certain value; those assets could be in Hong Kong or situated overseas.  The purpose of a mareva injunction pre-trial is to prevent a risk of dissipation of assets by the defendant for ulterior purposes before judgment.  The injunction is a remedy, not a cause of action; among other things, the plaintiff needs to have a good arguable claim to obtain a mareva before trial.

However, where there is a real risk of dissipation of assets by the defendant, a mareva injunction is a useful procedural initiative (provided the costs are justified relative to the value of the claim). A mareva injunction can come with ancillary orders for disclosure of certain of the defendant's assets.

The sort of in-built protections for a defendant include:

• a cap on the value of assets "frozen";
• notice of the defendant's right to apply to discharge or vary the injunction (including, the ancillary orders as to disclosure of assets);
• the defendant's right to obtain legal advice (and general common law right not to self-incriminate with respect to the disclosure orders);
• provision for the duration of the initial grant of the mareva injunction (until a further court hearing);
• provision for the defendant's living and/or business expenses and/or legal costs;
• the right of the defendant to provide security in lieu of the injunction;
• the plaintiff's undertaking to compensate the defendant for loss arising from the injunction if ordered to do so by the court (and to fortify this undertaking by a payment into court or suitable bank guarantee, if the court so orders);
• the right to be served with all relevant court papers relied on by the plaintiff to obtain the injunction.

Such in-built provisions are standard.(2) Any deviation from these provisions must be brought to the court's attention on the initial application and be supported by good reasons.(3)

Recent case

The recent case of Jen Kit v Chan Sau Wai [2014] HKEC 1851 is a case in point.(4) This case involved a dispute over a deceased's estate; the plaintiff being the deceased's daughter and administratrix of the estate and the defendant being the deceased's second wife. The plaintiff obtained an ex parte mareva injunction against the defendant's assets in Hong Kong, said to represent (in part) assets that had belonged to the deceased and which it was alleged he did not have the mental capacity to transfer to the defendant at the time.

On the defendant's subsequent challenge, the mareva injunction was discharged and not re-granted.

Procedural errors

The judge hearing the defendant's challenge noted that the mareva injunction appeared to have two procedural flaws.

First, and more importantly, the form of mareva obtained by the plaintiff (through her legal advisers) did not contain a standard provision permitting the defendant to spend a specified sum per week towards her ordinary living expenses and a reasonable sum for her legal costs in obtaining legal advice and representation.  The court was not attracted by the argument that the plaintiff was not in a position to know of the defendant's expenses. It could be assumed she had some.

Second, the provision in the mareva injunction for disclosure by the defendant of her assets did not contain standard wording that this was limited to assets above a specified value. Neither was such a provision a substitute for proper discovery between the parties on prior notice to the defendant.(5)

The court noted that neither point was specifically brought to the attention of the judge who granted the original mareva injunction (which had been continued at two further court hearings in the defendant's absence).

Applicant's duty to be full and frank

The plaintiff was also found to have breached an applicant's duty to be full and frank (given the defendant was not in court to put her side of the argument against the original grant of the mareva injunction).

First, on obtaining the mareva injunction, the plaintiff had relied on certain medical reports relevant to the deceased's alleged state of mind.  However, the plaintiff had failed to make it clear to the court that this evidence was 'preliminary' and that there were other medical certificates relevant to this issue that had not been drawn to the court's attention.

The court noted that in deciding whether the plaintiff had made a material disclosure, 'materiality' was not judged by whether the original court's decision would have been affected but rather whether the fact not disclosed was relevant to the court's overall discretion; as it was in this case, given that the mental condition of the deceased was a central issue in the proceedings.

Second, on obtaining the mareva injunction and trying to evidence a real risk of dissipation of assets by the defendant, the plaintiff had not properly explained the circumstances surrounding the defendant's sale of two properties in mainland China against the background of litigation there between the plaintiff (and her brother) and the defendant.

As a result, after four court hearings (three at which the defendant was not present) the mareva injunction was discharged and not re-granted (in the exercise of the court's discretion and having heard fuller arguments from both parties).(6)

Comment

The Jen Kit case may turn on its facts, but the lessons to be learned are clear.

'Ex parte' orders (granted in the absence of the other side) are not the norm in civil litigation in Hong Kong.(7) However, exceptionally and when properly obtained, orders like mareva injunctions do justify secrecy because of the fear that if the defendant knows of the application it will do the very thing the injunction is designed to prevent; the dissipation of assets for ulterior motives.

As can be seen from the in-built protections, mareva injunctions come with a heavy responsibility on the part of the plaintiff; in terms of the application, the grant and enforcement. Get this wrong, and (among other things) much time, effort, costs and tactical initiative can be lost.

In particular, a failure to follow the relevant draft order in the Practice Direction can be a costly mistake, particularly where that failure relates to fundamental provisions such as a defendant's living expenses and disclosure of assets. As already noted, the disclosure provisions in a mareva injunction are limited to details of certain assets and are not a substitute for the normal (later) discovery of relevant documents between the parties in a writ action in Hong Kong. That said, if a defendant wishes to challenge the scope of the disclosure provisions in the original mareva injunction the onus is on the defendant to raise this with the plaintiff's legal advisers immediately and, failing agreement, to make an application to the court for temporary relief without delay (and on notice to the plaintiff's legal advisers).

If a defendant can show a loss as a result of an injunction that should not have been granted, this can also sound in a damages claim against a plaintiff on its undertaking in the injunction (called a "cross-undertaking" as to damages, because historically the plaintiff's legal adviser is taken to have crossed the court with such an undertaking on the injunction being granted).(8)

In our experience, mareva injunctions are often granted during private court hearings ('not open to the public') lasting no more than approximately one hour.The court is heavily reliant on plaintiffs and their legal advisers observing not just the substance of the duty to be full and frank but also the form of the standard order. If the court papers are in order, the court will usually seek to assist deserving plaintiffs; in the knowledge that if an injunction is subsequently discharged and can be shown to have caused the defendant a loss the plaintiff will be required to comply with its cross-undertaking as to damages.

It is not in the interests of a plaintiff to seek to resile from its duty of candour to the court. That only creates problems later. Indeed, by being transparent with the court at the outset, a plaintiff is reducing the risk of the defendant successfully applying to discharge the mareva injunction.(9)(10)

Therefore, applications for mareva injunctions are a matter of both substance and form (not one over the other). When the court asks a plaintiff's legal adviser 'to give the normal undertakings' and (words to the effect) 'is there anything else you need to tell me', it is as well to know what this means and to be prepared to answer frankly, having taken full instructions from a plaintiff client.

For further information on this topic please contact Gary Yin. 

Endnotes

(1) Practice Direction 11.1, 'Ex parte, Interim and Interlocutory Applications for Relief (including Injunctive Relief)' and 11.2, 'Mareva Injunctions and Anton Piller Orders'.

(2) See Practice Direction 11.2. This also provides for the Mareva "sister"order – 'Anton Piller' (search and seize orders).

(3) Practice Direction 11.2 (paragraphs 2 and 3).

(4) HCA No. 346 of 2014, 11 November 2014.

(5) In this case, relevant medical reports apparently relating to the deceased over a fifteen year period.

(6) On 28 November 2014, the plaintiff applied to the court for further injunctive relief.

(7) L v C [2004] HKEC 481, CACV No. 333 of 2004.

(8) For example, see: MGA Entertainment Inc v Toys & Trends (Hong Kong) Limited (2014) 17 HKCFAR 27; Hone & Ors v Abbey Forwarding Ltd & Anor [2014] EWCA Civ. 711; and client briefing – 'HK's top court adopts common sense approach to assessing a party's loss when injunction is discharged', 24 February 2014 (www.rpclegal.com).

(10) A good technique, if the structure of the document permits (while avoiding repetition), is often to have a separate heading in the sworn statement (known as an affidavit or affirmation) in support of the application for a mareva: "[Applicant's] [Plaintiff's] duty to be full and frank". This can deal with points that count against the claim and/or the grant of the injunction; for example, points that the plaintiff knows the defendant would reasonably make if they were in court.

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