The Hong Kong Court affirms that victims of fraud's concerns over dissipation of assets in Mareva injunction is justified notwithstanding LNCs in place

Following the Hong Kong Court of Appeal's decision in Tam Sze Leung & Ors v Commissioner of Police [2023] HKCA 537 (discussed in our previous blog post here), the constitutionality of "letters of no consent" (LNC) appears to be settled for the time being. The Court of Appeal held that the Police's issuance of LNCs did not amount to any informal, unregulated – and unconstitutional – asset freezing power. It is up to the bank to decide whether to freeze a bank account, notwithstanding the presence of an LNC.

A more practical issue was addressed in the recent decision of Stephen Anthony Sokyka v Hang Xu Trading Co., Limited [2023] HKDC 947: given Hong Kong law requires an applicant to demonstrate that there is a real risk of dissipation of assets available to satisfy judgment before a Mareva injunction is granted, can this requirement still be satisfied if the relevant bank has already taken appropriate steps to freeze funds held in a bank account that is subject to an LNC?

In Stephen Anthony Sokyka, the victim of fraud applied for a Mareva injunction application even though the bank had already frozen the account where the misappropriated funds were redirected after the Police issued an LNC. The Court reiterated that LNCs did not serve as an enforceable order by the Police to the bank, nor did the Police have power to require the bank to do anything. The mere fact that an LNC was issued over the funds or account(s) in question was "not a cure to the anxiety" of the freezing injunction applicant's concerns over dissipation of its assets. The Court therefore proceeded to grant the injunction sought.

This decision directly puts in perspective the key difference between an LNC and a freezing Mareva injunction. While the former leaves leeway for banks to come to its own decision whether or not to freeze accounts, the latter, if granted, is a compulsory order to freeze funds, the breach of which would result in contempt. Victims seeking to protect their funds should therefore seek a Mareva injunction, instead of relying on any LNCs that have been issued over the funds in question. Moreover, it should be remembered that LNCs issued are subject to periodic review by the Police and are withdrawn within six months of issuance under normal circumstances.

On the other hand, banks should be prepared to juggle between duties to execute client instructions on the one hand, and to refrain from dealing with proceeds of crime under statute on the other. Formulating appropriate response strategies is therefore crucial for banks to justify its actions and decisions both to their clients and to authorities.

For more information, please contact Gareth Thomas, Partner, Rachael Shek, Partner, Jojo Fan, Partner, Timothy Shaw, Senior Associate, or your usual Herbert Smith Freehills contact.