Recently, the courts of several Caribbean islands — long considered to be havens where funds could be stashed beyond the reach of creditors — have demonstrated they are prepared to take determinative action to prevent dissipation of assets that might respond to a prospective judgment from a foreign court.
First came the Black Swan and Yukos decisions from the British Virgin Islands, and now the Cayman Islands Court of Appeal has waded into the judicial lawmaking waters. It has concluded that a freezing order ancillary to the enforcement of an anticipated foreign judgment may be granted to freeze assets that are not owned directly by the defendant to the foreign proceeding in which the original Mareva order is issued when “the administration of justice so requires.”
The increased willingness of Caribbean courts to assist foreign courts reflects their cognizance of the global economy in which we now operate, and the particularly influential role these tax haven countries play in international finance. The decisions are in keeping with the broad policy objective adopted by most western judicial systems to promote comity, particularly in cases where the litigation crosses borders. As Lord Browne-Wilkinson said in 1993’s Channel Tunnel Group Ltd. v. Balfour Beatty Construction Ltd.: “It would be a serious matter if the English courts were unable to grant interlocutory relief in cases where the substantive trial and the ultimate decision of the case might ultimately take place in a court outside England.”
In VTB Capital PLC v. Universal Telecom Management, the Cayman Islands Court of Appeal considered whether it had the power to grant a Mareva injunction over defendants against whom no substantive cause of action is asserted (“non-cause-of-action-defendants” or “NCADs”) when the cause of action defendant is beyond the jurisdiction of the court. The court concluded, in an appropriate case, it does have the authority to make an interlocutory order to freeze the assets of a company located in the jurisdiction, even when no direct cause of action has been asserted against that company by the plaintiff, but that company’s assets might be called upon to respond to a prospective judgment in a foreign proceeding prosecuted by the plaintiff debtor.
The decision in VTB Capital was the final act in a long, drawn-out saga between a U.K.-based investment bank and a Russian national, whom VTB alleged had defrauded it of many millions of dollars. VTB commenced an action against the alleged fraudster (a Mr. Malofeev) in the U.K. It did not name the Cayman companies as defendants in that proceeding, but it did seek, and originally obtained, a worldwide Mareva against Malofeev. Malofeev did not have a direct interest in the Cayman companies, but he did have an indirect interest in them.
Having obtained the initial Mareva order in the U.K., the plaintiff then commenced a proceeding in the Cayman Islands naming Malofeev and two Cayman domiciled companies in which he had an indirect interest. The only relief sought against the companies was an order freezing certain assets pending the outcome of the U.K. proceeding. The Cayman court refused to assume jurisdiction over Malofeev personally. But a preliminary ex parte freezing order was granted over certain assets of the local companies. However, that order was not continued, and that decision was the subject of the appeal.
On the appeal, the Court of Appeal concluded it did have jurisdiction to grant a freezing order over the assets of the locally domiciled companies, although it declined to exercise that discretion on the facts before it. It set out the following test:
1. The person against whom the Mareva order is sought must be subject to the court’s jurisdiction;
2. Where no cause of action is alleged against the person against whom the freezing order is sought, it is not necessary for the substantive claim against the cause of action defendant (i.e. the debtor) to be asserted in the jurisdiction where the Mareva order is sought against the NCAD;
3. However, the cause of action asserted against the cause of action defendant must be one that is recognized by the court granting the Mareva order; and,
4. If those requirements are met, it is not necessary for the cause of action defendant to be a party to the proceeding where the Mareva is sought against the NCAD, or even subject to that court’s jurisdiction.
Accordingly, the Cayman court did have jurisdiction to make a Mareva order against the domestic companies, even though no substantive cause of action was asserted against them and it had not assumed jurisdiction over the Russian defendant to the U.K. proceedings. Where the administration of justice requires the court to make a freezing order, it may do so.
In Cayman, in order to obtain a Mareva freezing order, the moving party must satisfy the court of two things:
1. There must be good reason to believe the assets to be frozen would become available to satisfy the judgment sought by the plaintiff in the original action; and,
2. There must be good reason to believe, in the absence of the freezing order, there is a real risk the assets will be dissipated or put beyond the reach of the plaintiff.
With respect to the first point, the moving party will be required to establish there is good reason to believe the cause of action defendant can be compelled to cause the assets of the NCAD to be used to satisfy the prospective judgment, or there is some other process of enforcement by which the plaintiff will be able to obtain recourse to the NCAD’s assets. In most cases involving savvy fraudsters, this will be no simple task, as they often will have arranged their affairs to be judgment proof prior to engaging in the particular scheme that is the subject of the litigation — as was the case in the subject litigation.
However, there may be cases where the complex corporate structure is established specifically so the NCAD will hold the proceeds of the scheme, and the rogue continues to maintain an indirect beneficial interest in the entity with the loot. If the plaintiff can connect the dots, then the authority of VTB Capital will be available to support obtaining a freezing order over the assets in another jurisdiction, even when the court of that other jurisdiction will not assume jurisdiction over the primary defendant.
It remains to be seen whether Canadian courts will also extend the long arm of the worldwide Mareva to lock down assets of Canadian companies against whom no direct cause of action is asserted by a foreign claimant. Given the desire of the courts to remain consistent with their international counterparts, it is likely this is another area in which the courts will be receptive to extending the Mareva principles as a show of comity. However, it is unlikely the test will be as low as that articulated by the Cayman Court of Appeal.
In the case of a Mareva, one can still expect the courts in this jurisdiction will insist the moving party establish both a strong prima facie case that the assets will be eligible in the enforcement of the prospective judgment, as well that the moving party has established a strong prima facie case against the primary defendant before such a draconian order would be granted in this jurisdiction.