Freezing orders are on the up but companies are still keen to avoid the costs of litigation. Andrew Mitchell reports

Late last year, the Ministry of Justice announced figures which surprised and worried litigators.

The numbers of claim forms filed over the previous year indicated that disputes started had stayed largely static despite the deteriorating economic climate.

All lawyers should be concerned by this development because traditionally in the good times transactional work drives law firm profits. As the deal flow dries up, contentious practitioners had previously come into their own and picked up the profits per equity partner (PEP) slack.

The reasons for this are many and varied. Among them is the fact that as companies' profits drop, closer scrutiny tends to be paid to cash flow and this, on occasion, reveals money being siphoned off or otherwise misused. At this point a company will take a commercial decision as to whether the costs and uncertainty inherent in litigation justify the possibility of the recovery of the sum in question. It appears, presently, that many companies are deciding not to commit to legal proceedings. In the past litigation would have been at the forefront of the minds of those seeking to recover commercial losses.

Against this backdrop then, it might come as a surprise to learn albeit anecdotally (a good litmus test, however), that the courts are busy hearing submissions concerning freezing and search orders.

What does this trend indicate? The first thing to note is that obtaining a freezing order compels a claimant to quickly file a claim relating to the assets or their traceable value. From the fact that this does not appear to be happening, we can infer where interim relief is obtained, many disputes are being settled by the parties prior to a claim being filed.

This is wholly unsurprising in some contexts. While securing its assets will be uppermost in the mind of a company acting against a fraudulent employee, there are profound issues of reputation which must be considered before taking the next step and beginning a claim. What does this say about the security, trustworthiness and competence of a commercial organisation if it cannot protect itself from its own employees? Does X plc really want to wash its dirty linen in public in this way? Plainly not. Does it wish to protect its assets? Of course it does, particularly in difficult economic times.

It is important to note that people do not necessarily become any more or less dishonest in a recession. The recent surge in applications for freezing orders indicates a return to financial first principles among commercial enterprises and a closer eye being kept on cash assets. That corporate focus appears to be returning to the bottom line and away from complex financial structures is perhaps to be welcomed. That more fraud is detected as a result should not be taken to imply that there is more of it about in today's conditions.

And what of the investigating and prosecuting authorities in these times? The change of leadership at the Serious Fraud Office (SFO) has resulted in a newly invigorated organisation. More judicious use of resources is informing more careful case selection. In the early stages of a case, use of appropriate investigatory powers or civil sanctions will put SFO lawyers in a stronger position to negotiate concerning the matters that it pursues in the public interest.

Going forward, we can expect to see a more proactive use of restraint orders by the SFO and Serious Organised Crime Agency (SOCA), coupled with more traditional tactics such as dawn raids.

This, too, will add to the workload of the courts. We can also expect to see more matters arising from whistleblowing as the SFO inches, perhaps inexorably towards a more formalised system of plea bargaining.

SOCA in particular has been innovative in its use of freezing and search orders following failed criminal proceedings. In these circumstances where a criminal prosecution has failed, SOCA identifies assets which it believes to be the proceeds of crime. A freezing order is obtained and the defendant will become subject to a civil recovery action in respect of his property which if it can be shown was obtained through unlawful conduct will be subject to a civil recovery order.

What this means in practice is that the prosecuting authorities (and SOCA) are able to take a second bite at the cherry in relation to what is alleged to be the fruits of crime. Whether this is a good or bad thing depends on your point of view, but it does mean increased litigation.

Looking at emerging trends in the fraud litigation market it is apparent that mortgage fraud will make a strong showing in 2009. Rather than a simple overvaluing of a property in order to obtain purchase finance, fraud in relation to a portfolio of properties will likely worry lenders. Rocked by plunging asset prices and restricted access to finance, reckless owners or managers of portfolios may be tempted to misrepresent the extent to which their portfolio has been leveraged. We can expect lenders who become aware of this happening to also reach for freezing orders.

It looks like the early stage litigation market will improve as the recession bites.

For lawyers, the scenario in which companies and individuals, scared off by the cost of litigation and the risk attached, settle progressively more disputes before ever filing a claim is a grim one; and one that will require the rethinking of litigation department business models. For clients, however, there is an upside to this, notwithstanding the fact that full recovery might become more and more rare.

This swift, settled disposal of disputes was perhaps precisely what Lord Woolf was striving for in 1998 when the changes to civil procedure which bear his name were introduced. Whatever the future holds for the litigation market it seems certain that the best interests of claimant clients will be served by ensuring that they are in the strongest possible negotiating position by obtaining interim relief, even if instructions to proceed to trial become ever rarer as time goes by.