What Is A Freezing Order Used For In Insolvency?

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When a company becomes insolvent, this means that they are unable to pay their debts as and when they fall due. When this happens, the directors of the business are required to prioritise the interests of creditors to whom they owe money. On occasions where a creditor feels that the company is not working in their interests to repay the debt, they may feel obliged to take action. One of the ways in which they may choose to do this is by issuing a freezing order. Let’s take a closer look at what this involves. 

What Is A Freezing Order?

A freezing order is a legal injunction that prevents a company from selling or disposing of their assets. This can cover many types of asset, including property, land, vehicles, shares, bank accounts, and investments. A freezing order typically lasts between 7 and 14 days and is aimed at protecting the value of company assets so that the necessary repayments can be made to creditors. This is a serious step to be taken by creditors and the freezing order will come into effect as soon as the company has been notified. Failing to comply with a freezing order by selling or disposing of the assets named in the injunction could have serious legal implications. That’s why it’s essential to adhere to the freezing order rigidly and to consult the guidance of a licensed insolvency practitioner if you have any questions about the process. 

Why Are Freezing Orders Used?

As we touched upon previously, a freezing order is aimed at protecting the value of a company’s assets in order to protect the money that is owed to creditors. This is a serious step for creditors to take and so it’s essential that they have the necessary evidence to back up the order. The creditor is required to swear an affidavit confirming that they’ll pay any damages incurred by the business in the event that the freezing order has been wrongly issued. They’ll also need to provide evidence that they have the financial means to pay these damages should this be necessary.

In order to apply for a freezing order, the creditor needs to have a substantive ‘cause of action’ to back up their case. This may include evidence that numerous attempts have been made to collect the money owed without success, or evidence suggesting that the company is taking deliberate action to prevent assets from being sold to repay creditors. In order to assess the application fairly, the court will use a ‘balance convenience test’ that compares how the creditor would benefit in relation to the financial damage that would be caused to the company in question. As this suggests, freezing orders are not taken lightly and so if you are a creditor who is considering applying for an injunction, it’s essential to consult professional insolvency advice prior to doing so. 

Can A Freezing Order Be Challenged?

A freezing order can be challenged, however this will need to be done swiftly and under professional guidance. Directors will need to have strong arguments against the order in order for the challenge to be heard. This may include evidence that the creditor has misrepresented the facts or falsely disclosed information. Equally, if the creditor has taken a long time to apply for the order, the necessity of the injunction may be questioned. If directors think they may have grounds to challenge a freezing order it’s essential that they seek the advice of a licensed insolvency practitioner as early as possible. A professional insolvency expert will be able to assess whether or not their claims will be considered valid.

For confidential insolvency advice that’s tailored to your individual needs, don’t hesitate to get in touch with our experienced team of licensed insolvency practitioners at My Liquidation.

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