Cayman Islands: Normal Service Resumed? Another Look At Cayman Freezing Orders

Introduction

No sooner than Gillies-Smith¹ appeared to rewrite the Cayman courts' approach to free-standing freezing orders (or Mareva injunctions), considerable doubt has been thrown on that decision. The recent judgment in VTB Capital Plc v Malofeev² reemphasises the traditional principled objections to the grant of such free-standing freezing orders, particularly the issue of whether leave may be granted to serve a defendant outside the jurisdiction where there is no substantive cause of action against it in the Cayman Islands. The refusal to allow service on a non-resident defendant directly contradicts the decision in Gillies-Smith and signals a return to earlier jurisprudence.

The decision in VTB Capital also raises further important questions in relation to whether free-standing so-called 'Chabra orders' may be awarded in the Cayman Islands. The judgment leaves open the question of whether such orders may be awarded. However, this has not yet been tested on an inter partes basis.

Facts

In VTB Capital the plaintiff – a bank registered in London – had issued proceedings and obtained a worldwide freezing order in England against a Russian national, Mr Malofeev, and various corporate entities. The plaintiff's substantive claim in England was for deceit or, in the alternative, conspiracy to defraud.

The plaintiff then sought a freezing order in the Cayman Islands against Malofeev (the first defendant) and two companies incorporated in the Cayman Islands (the second and third defendants).

The plaintiff relied on Gillies-Smith for authority that enforcement of the English freezing order constituted a cause of action against the first defendant in the Cayman Islands. No substantive cause of action was asserted against the second and third defendants. They were not defendants to the English proceedings and there was no English freezing order against them. However, it was asserted that they had assets which might be used by the first defendant to satisfy a judgment against him. Accordingly, for the purposes of the rule in TSB Private Bank International SA v Chabra,³ they were named as defendants (ie, 'Chabra defendants'). It had already been established that the Chabra jurisdiction is part of the law of the Cayman Islands.⁴

With regard to the issue of service, the plaintiff again relied on Gillies-Smith for authority that the first defendant could be served out of the jurisdiction, on the basis that the injunction sought was not "interlocutory" (which would cause it to fall foul of Order 11 Rule 1(1)(b) of the Grand Court Rules), but rather final. The plaintiff did not have to deploy such arguments against the second and third defendants, as they were incorporated in the Cayman Islands.

Decision

The Grand Court of the Cayman Islands refused to make a freezing order against the first defendant, and in doing so declined to follow Gillies-Smith. It did so on the basis that it was unable to grant leave to serve the first defendant out of the jurisdiction because it was bound by precedent, including the decision of the majority of the Privy Council in Mercedes-Benz v Leiduck,⁵ to the effect that a freezing order is an interlocutory injunction and accordingly Order 11 Rule 1(1)(b) did not give the court power to order service out. In coming to this conclusion it also implicitly rejected the argument, accepted in Gillies-Smith, that the plaintiff's wish to enforce a foreign worldwide freezing order provided a cause of action in the jurisdiction (this argument was suggested by Lord Nicholls in his dissenting speech in Mercedes-Benz). Had the court found that there was such a cause of action, it is likely that service out could have been effected under a different provision of Order 11 Rule 1. In any event, given the court's comments about judicial precedent and the decision in Mercedes-Benz, it appears clear that the court did not accept that the plaintiff had a Gillies-Smith cause of action by virtue of its desire to give effect to the English freezing order.

With regard to the second and third defendants, the question for the court was simply whether it had the power to grant a freezing order against them on Chabra principles. Historically, Chabra orders have typically been awarded in the Cayman Islands in circumstances in which a freezing order is also awarded (or at least could be awarded) against the principal defendant in the jurisdiction. Given that the court had determined that it could not grant freezing relief against the first defendant, could it grant freestanding freezing relief against the second and third defendants? The plaintiff cited authority from the British Virgin Islands,⁶ which demonstrates that that jurisdiction recognises free-standing Chabra orders. The court followed the BVI authorities and granted the order sought, but stated that it did so "not without hesitation" and so that the matter could be resolved at an inter partes hearing with the benefit of argument on both sides.

Comment

The court's assessment of freezing orders as interlocutory injunctions is more consistent with established case law than the interpretation offered in Gillies-Smith. With regard to this issue, Gillies-Smith should now be treated with considerable caution and the provisions of Order 11 Rule 1(1)(b) as they stand appear to present an insurmountable bar to the service out of the jurisdiction in relation to an application for a free-standing freezing order against non-resident defendants. In this regard, it would appear that normal service has been resumed.

The decision in relation to Chabra orders raises many further questions. As stated, there was no need for the court to find a cause of action against the second and third defendants, nor for leave to be granted to serve out. At first glance the decision may therefore appear uncontroversial. However, on closer inspection it is likely to cause as much unease among legal commentators as it evidently caused the court. There is no earlier Cayman Islands authority for the court entertaining proceedings where there is no cause of action against any defendant. In the absence of a cause of action, it is unclear how the usual requirements for the award of a freezing order can be established. For instance, an applicant for a freezing order must satisfy the court that it has a good arguable case that will succeed in the litigation. However, if the plaintiff cannot show that it has a cause of action against any party in the jurisdiction, is the court required to examine the merits of the underlying action in the "home" jurisdiction of the litigation, against a defendant which is not a party to the Cayman proceedings, to determine whether there is a good arguable case? This issue was not discussed in VTB Capital, in which the court held that there was a good arguable case, but did not explain what it was.

Furthermore, if free-standing Chabra orders may be granted against defendants in the jurisdiction, but free-standing freezing orders against substantive defendants outside the jurisdiction may not be granted, there is scope for incongruous results. Where a foreign defendant directly owns assets in the Cayman Islands, as well as having indirectly owned assets held through a Cayman Islands entity, by application of VTB Capital the directly owned assets may not be frozen, but the indirectly owned assets may be (on Chabra principles).

The court in VTB Capital stated that it supported the public policy considerations for permitting free-standing freezing orders in the Cayman Islands and held that it was "regrettable" that there is no statutory provision equivalent to Section 25 of the English Civil Jurisdiction and Judgments Act 1982 (which permits in clear terms the grant of freezing orders in England in aid of proceedings in other states). The enforcement of foreign judgments is shortly to be considered by the Cayman Islands Law Reform Committee, and it is hoped that a coordinated approach may be taken to ensure that the existing arrangements regarding freezing relief are considered and replaced with a legislative framework which resolves the issues identified above.

Footnotes

1. Gillies-Smith v Smith (unreported, Quin J, May 12 2011).

2. Unreported, Cresswell J, August 18 2011.

3. [1992] 1 WLR 231 (ChD).

4. See for example AHAB v Saad Investment Company Limited (unreported, February 15 2011, Cayman Islands Court of Appeal).

5. [1996] 1 AC 284.

6. Black Swan Investment ISA v Harvest View Limited (Unreported, Bannister J, March 23 2010) and Yukos CIS Investment Limited v Yukos Hydrocarbons Investments Limited, BVIHC (COM) 85/2010. The analysis of Black Swan in Yukos was upheld on appeal (HCVAP 2010/028).

Originally published in International Law Office

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