Cayman Embraces "Free Standing" Freezing Injunctions
In a landmark decision in VTB v Universal Telecom Investment Strategies Fund SPC ("UTISF") (CICA, 5 June 2013)1, the Cayman Islands Court of Appeal has confirmed the availability of "free-standing" freezing injunctions in support of foreign legal proceedings, including against Cayman Islands entities against which no wrongdoing is alleged.
The question of whether the Cayman Islands court has the jurisdiction to grant freezing injunctions in the absence of substantive local proceedings (i.e. purely in support of foreign proceedings) was, until now, unsettled. This is partly because the Cayman Islands has no equivalent to section 25 of the England and Wales Civil Jurisdiction and Judgments Act 1982, which confers that jurisdiction by statute. The same is also true of a number of British Commonwealth countries, and these have adopted differing approaches as to whether that power should be extended only by legislation, or whether the court's equitable jurisdiction is in any event wide enough to grant free-standing injunctive relief. The Court of Appeal in VTB v UTISF has held that the latter is the correct position in the Cayman Islands.
The Cayman Islands proceedings were founded in the recent high-profile English litigation, VTB v Nutritek. In that case, Mr Malofeev (a prominent Russian businessman) and others had been sued by VTB which alleged, among other things, fraud. VTB then came to the Cayman Islands and sought a freezing injunction against UTISF, a Cayman Islands domiciled corporate fund, the participating shares of which were beneficially held by Mr Malofeev (through a BVI company). No wrongdoing was alleged against UTISF itself, or against its directors, who were independent of Mr Malofeev. UTISF's management was affiliated with a prominent Russian bank, which was similarly not accused of any wrongdoing.
The Cayman Islands freezing injunction was sought against UTISF on the basis of the so-called "Chabra" jurisdiction. That jurisdiction (which is well established and exists in England and elsewhere) permits the court to grant a freezing injunction against a "non-cause of action defendant" (or "NCAD") where it can be shown that the assets of the NCAD could ultimately be used to satisfy a judgment against an alleged wrongdoer and the evidence shows a real risk that assets may be dissipated.
However, and unusually in the Cayman Islands, there was no substantive claim before the court: the substantive litigation was in England. VTB had also earlier failed in its bid to join Mr Malofeev (the "cause of action defendant" or "CAD") to the Cayman Islands proceedings. So, the only claim before the court was a stand-alone application to freeze the assets of the fund – i.e. an NCAD. The Court of Appeal was therefore asked to consider whether the court had jurisdiction to grant a "free standing" freezing injunction against an NCAD.
Chadwick P, with whom Mottley and Campbell JJA agreed, held that the Cayman Islands court does have this jurisdiction, and laid out four principles which the Court of Appeal considered flowed from the authorities:
(a) The person against whom the freezing injunction is sought must be subject to the jurisdiction of the court. UTISF was such a person, being a Cayman Islands domiciled company.
(b) Where there is no cause of action alleged against the person against whom the freezing injunction is sought (that is, where the plaintiff seeks Chabra relief against an NCAD), it is not necessary that the substantive claim against the CAD has been brought in the Cayman Islands court. In other words, freezing orders can be "free standing" in support of foreign proceedings.
(c) The substantive claim against the CAD, wherever it is brought or pursued, must be founded on a cause of action which would be recognised by the Cayman Islands court where the freezing injunction is sought.
(d) If those requirements are met, there is no reason in principle why the CAD should itself be a party to the proceedings in which the freezing injunction is sought against the NCAD.
Having found that the jurisdiction existed to freeze the assets of UTISF, however, the Court of Appeal discharged the injunction on the grounds of discretion. In particular, the Court of Appeal doubted there was any real prospect that Mr Malofeev could be compelled to cause the assets of UTISF to be used to satisfy the judgment which it sought in the English proceedings. This meant that, even with the court's expanded free-standing jurisdiction, VTB fell short of meeting the test for Chabra relief.
This decision significantly clarifies and expands what was generally considered to be the Cayman Islands courts' jurisdiction to freeze assets held by Cayman Islands companies which might ultimately belong and/or be controlled by an alleged wrongdoer. While the test for freezing injunctions remains quite onerous (which seems appropriate for what can be a highly invasive and disruptive remedy), this broadened jurisdiction gives the court a good degree of flexibility to fashion the appropriate relief in the appropriate circumstances.
1Maples and Calder acted for the successful fund in VTB v UTISF. This is the latest in a line of Cayman Islands Court of Appeal decisions relating to freezing injunctions in which Maples and Calder has acted for the successful party.