Scotland
1. Are freezing orders (or their equivalent referred to below) available in civil legal proceedings in this jurisdiction and what is their effect?
Yes. They are referred to in Scotland as an Arrestment Order and served on a party (arrestee) holding moveable property including cash and other moveable assets (such as shares) on behalf of the debtor. They can be sought before or during the litigation to secure the debtor’s assets pending the outcome of the litigation (arrestment on the dependence), or on conclusion to freeze assets in satisfaction of a judgment (arrestment in execution).
The arrestee is prohibited from allowing the debtor to dispose of the arrested assets until a time specified in the order. The arrestee can become liable for the sum arrested should they wrongly release the assets contrary to an arrestment order.
2. Are other interim orders commonly made in conjunction with a freezing (or equivalent) order?
Depending on the facts of the case, it may be necessary to also seek an inhibition on the dependence, used in relation to heritable property, usually land or buildings, rather than money or moveable property. It prevents the defender from dealing with his property in a way which might prejudice the claim of the pursuer, such as by selling the property and disposing of the proceeds.
There is no Court mechanism for an asset disclosure order in Scottish proceedings. A party seeking an arrestment will usually know or suspect where the debtor’s assets are located or will make private investigations prior to serving the notice.
In instances where a party has no indication as to which bank holds the debtor’s funds, the party will serve the arrestment order on every major bank in the UK. This can be tactical, and factors such as where a debtor lives (and which banks are in that area) can increase success.
3. Briefly what is the relevant legal test?
To obtain an arrestment order on the dependence of the action you must satisfy the Court that:
(i) the creditor has a prima facie case on the merits of the action;
(ii) there is a real and substantial risk that the creditor, if successful, would be prejudiced by reason of the debtor being insolvent or verging on insolvency or the likelihood of the debtor disposing of, or concealing their assets; and
(iii) it is reasonable in all the circumstances, including the effect granting an arrestment may have on any person having an interest, to do so.
On receipt of the final decree (judgment) all creditors are entitled to serve an arrestment in execution and do not need to revert to the Court.
4. Briefly what is the process for obtaining a freezing (or equivalent) order?
When raising an action the creditor makes an application to the Sheriff Court or Court of Session for warrant to arrest on the dependence of the action. The Writ or Summons will set out the reasons for the application and the basis on which the relevant tests are met. Normally the application is made without giving notice to the debtor. The judge will consider the application and if satisfied the tests are met will grant the application ex parte. Alternatively he may require the applicant to attend in person to provide further detail. Where the Court makes an order for arrestment on the dependence they must also fix a subsequent hearing which allows all parties with an interest to return to Court and make representations in relation to the recall of the arrestment.
5. Does the applicant have to provide any form of security or commit to compensation if its claim is ultimately unsuccessful and any freezing (or equivalent) order granted causes loss and damage to the respondent?
No. Wrongful diligence may amount to negligence and the party instructing it found liable in damages, however, in general the party making the claim must aver and prove malice and want of probable cause to be successful. This is a high benchmark which makes successful actions unusual.
6. Can it be sought against third parties?
No. You are only able to freeze the assets of a party to the Court action.
7. What assets are covered by a freezing (or equivalent) order?
Any corporeal moveable property located within Scotland except for wages or pension payments.
Note: It was held in the Sheriff Court case of Stewart v The Royal Bank of Scotland plc, that where a defender’s account is held at an English branch of a bank, but the pursuer serves an arrestment on a Scottish branch of that bank, the arrestment will not “catch” the defender’s account.
8. Can a freezing (or equivalent) order be made in support of substantive proceedings abroad?
Yes.
9. Can a freezing (or equivalent) order be made in support of arbitration proceedings or awards?
Yes.
10. At what stage of proceedings can a freezing (or equivalent) order be sought?
At any stage, however most commonly prior to commencing proceedings or following judgment to assist with enforcement.
11. Are there typically any exceptions to the general prohibition on the respondent’s use of assets subject to a freezing (or equivalent) order?
Yes. The sum attached (i.e. “caught”) by arrestment on dependence is limited by the Debtors (Scotland) Act 1987 (referred to herein as the “DSA”) section 15 which provides that the amount should not exceed the maximum of an aggregate of:
(a) the principal sum concluded for:
(i) a sum equal to 20% of that sum (or such other sum as the Scottish Ministers may prescribe);
(ii) a sum equal to one year’s interest on the principal sum at the judicial rate;
(iii) any sum which the Scottish Ministers may prescribe which appears to them to be reasonable having regard to the expenses likely to be incurred by a creditor and chargeable against a debtor in executing an arrestment on the dependence.
This is subject to the protection of a minimum balance of the debtor (DSA 1987, section 15H(4)) which is currently set at £529.90. There is no protected minimum balance where an account is used for business purposes.
For both individuals and businesses, there is no exception to cover legal expenses incurred by the debtor. Furthermore, should the debtor go on to lose the action, they will be liable for the other side’s expenses on top of their own.
12. What happens after a freezing (or equivalent) order is granted?
The creditor will serve the order on any third parties (such as banks) who might hold the debtor’s assets. Assuming the original order was obtained without notice (as it often will have been), there will be a return hearing whose date is stated on the face of the order, at which the debtor may challenge the order. At this point the original order will either be set aside, varied, or remain in place. There are no restrictions on how many times the debtor can bring a motion to have the order recalled.
13. Who pays the costs of the application for a freezing (or equivalent) order?
A creditor is entitled to his expenses in obtaining and executing a warrant for arrestment on the dependence. The Court may modify or refuse such expenses if it is satisfied that either the creditor was acting unreasonably in applying for the warrant, or such modification or refusal is reasonable in all the circumstances and having regard to the outcome of the subsequent Court action.
14. What protections are there typically in a freezing (or equivalent) order for third parties to such orders?
(i) Only funds held at the specific time the arrestment is served are caught. Any funds deposited after service are not caught and would require the order to be reserved.
(ii) An arrestment order only affects assets held in Scotland on behalf of the debtor by the party on whom the arrestment is formally served. An arrestment order only affects third parties outside of the jurisdiction in certain circumstances – see question 17.
(iii) An arrestment order does not prevent a third party from complying with what it reasonably believes to be its obligations under the law of the country where the assets are located or the law of any contract between itself and the debtor or any orders of the Courts of the country where the assets are located – see question 17.
(iv) Once funds are “caught” by an arrestment the arrestee must comply with the terms of the order. Any monies due by the debtor to the arrestee that are attached must not be deducted. The arrestee must tell the creditor within three weeks of the arrestment being served if it has been successful. The arrestee does not need to disclose anything if the arrestment has been unsuccessful, although this commonly occurs anyway.
(v) A third party to an arrestment order does not need to enquire about the application of any money withdrawn by the debtor if the withdrawal appears to be permitted by the arrestment order, as a third party is duty bound to follow an arrestment order (including any permittable withdrawals).
(vi) An arrestee is not liable to either the creditor or debtor for any losses suffered so long as it complies with the terms of an order in good faith.
15. What are the consequences of breach of a freezing (or equivalent) order?
If the arrestee (party holding the funds for the debtor) voluntarily pays the sums arrested to the debtor or other party, he commits a breach of the arrestment and is liable to the creditor to the extent of the sum arrested, (not the sum sued for). If he transferred an item such as a car, for example, and the value of the subject cannot be ascertained, the whole debt due becomes due to the creditor. It is also possible that an arrestee who pays or delivers in breach of the arrestment may be held in contempt of Court and subjected to criminal sanctions, but this is only in extreme cases where there is clearly no misunderstanding or inadvertency on his part.
16. Does a third party notified of (but not a party to) a freezing (or equivalent) order owe a duty of care to the applicant (meaning it can be liable to the applicant for non-compliance)?
No.
17. Can a freezing (or equivalent) order be enforced abroad?
Yes, in principle, although subject to the laws of the relevant jurisdiction. However, this can only be sought with the permission of the Court and enforcement itself will be a matter of local law.
18. Can freezing (or equivalent) orders from overseas jurisdictions be enforced in this jurisdiction?
Arrestments are normally sought on the dependence of Scottish claims but need not be limited to actions raised in the Scottish Courts. If you have issued proceedings in another jurisdiction you can rely on those proceedings and petition the Court of Session in Edinburgh to grant an arrestment order to freeze the defendant’s property in Scotland.
Contacts
Alastair Frood Partner Eversheds Sutherland Edinburgh, Scotland alastairfrood@eversheds-sutherland.com www.eversheds-sutherland.com Clem McLean Associate Eversheds Sutherland Edinburgh, Scotland clemmclean@eversheds-sutherland.com www.eversheds-sutherland.com
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