When a company owes money that it cannot repay and the business has to be liquidated, its assets are sold and the proceeds distributed to provide a dividend for creditors. If directors transfer assets away from the company, however, it can seriously deplete creditor returns.
In a typical liquidation, unsecured creditors receive very little in the way of recompense, so if there’s a risk of assets being hidden it’s important to prevent it - freezing orders are intended to protect creditor interests in this respect.
A creditor who believes company directors may try to hide or remove assets, whether the company is insolvent or not, can apply to the court for a freezing order, formerly known as a Mareva Injunction.
In doing so they must present a strong case to the court to support their application. The applicant is likely to have consistently attempted to recover their debt, with no success, and fears that they may be unable to secure a return.
Any creditor applying for a freezing order against company directors must be prepared to pay compensation to the debtor, however, if it later emerges that such an order wasn’t necessary. Applying for a freezing order is a serious action by a creditor, and isn’t one that’s undertaken lightly given the risk of having to pay financial damages to their debtor.
Any type of company asset can be subject to a freezing order. Assets commonly frozen by court order include vehicles, equipment, property, and bank accounts, but the court may set a specific value for the injunction and include various assets to the value of the debt.
The freezing order typically remains in place for 7-14 days – often the time leading up to a court judgment – but this time period can be extended by the court as necessary, or they can discharge it if circumstances change.
A freezing order ‘with notice’ means the company directors can be present at the hearing when the court makes their initial decision. As the name suggests, a ‘without notice’ freezing injunction doesn’t notify directors.
In the case of a ‘without notice’ freezing order, an interim injunction is made by the court and the company directors are called to attend a second hearing to provide the evidence requested. An application for this type of injunction must include specific reasons why directors shouldn’t be informed, and be supported by strong arguments.
The applicant has to convince the court that they’re applying for a ‘without notice’ freezing order because if notice was given, the court order would fail in its essential purpose – that there’s a high likelihood that assets would be disposed of if the company directors were aware of the application.
If company directors fail to comply with a freezing order they face severe financial penalties, and potentially a prison sentence. Non-compliance is viewed as contempt of court, and penalties can also be imposed on third parties who handle the assets.
It’s vital that company directors seek professional guidance on ‘with notice’ and ‘without notice’ freezing orders, and understand the ramifications of actions taken that don’t fully observe the requirements of the order.
Our expert team at UK Liquidators can provide the reliable professional advice you need. For more information on freezing orders for company directors, please get in touch to arrange a free, same-day consultation.
If you are considering liquidation for your limited company, taking advice from a licensed insolvency practitioner can help you understand your options.
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