Introduction

In the latest act of the on-going drama played out in the Cayman Islands Courts (and, indeed, the English and BVI Courts) between VTB Capital plc ("VTB") and Mr Konstantin Malofeev ("Mr Malofeev") and companies connected to him1, the Cayman Islands Court of Appeal has handed down a judgment of some significance. The decision clarifies the rights of plaintiffs to freeze the assets of "non-cause of action" defendants ("NCADs")2, so-called Chabra defendants, in circumstances in which the "cause of action" defendant ("CAD") is outside the jurisdiction of the Cayman Islands Courts. Coming in the wake of a line of authorities which are themselves difficult to reconcile, such appellate authority is most valuable. This is especially true given that the decision is handed down at a time where legislative reform in this area, while anticipated, remains in the pipeline.

Background to the Decision

Prior to the latest Court of Appeal decision, this matter had already come before the Cayman Islands Courts on several occasions. Proceedings had been commenced by VTB, an English-registered bank, against three defendants by generally endorsed Writ dated 11 August 2011. The first defendant was Mr Malofeev, a Russian citizen believed to be based in Moscow. The second and third defendants were two Cayman Islands companies, namely Universal Telecom Management ("UTM") and Universal Telecome Strategies Fund (the "Fund"), said to be controlled by Mr Malofeev. UTM and the Fund became the first and second respondents in the most recent appeal, since no appeal was brought against Mr Malofeev. VTB sought to freeze the assets of these companies on the basis that they were, effectively, assets which could be used to satisfy a judgment against Mr Malofeev.

The nature of Mr Malofeev's interest in UTM and the Fund came under scrutiny in the most recent appeal decision and it is accordingly worth recording that it was the Fund which directly held the underlying assets to which VTB sought recourse. There were two classes of shares in the Fund, Participating Shares and Management Shares. The Management Shares were held by UTM, and the Participating Shares, which carried with them the economic interest in the Fund, were owned by a BVI-incorporated company of which Mr Malofeev was the ultimate beneficial owner.

No substantive claim was ever advanced against any one of the three original defendants in the Cayman Islands. VTB and Mr Malofeev were parties to an action in England, and the primary relief sought by VTB against Mr Malofeev, UTM and the Fund and the two companies in the Cayman Islands was an injunction, pending the final determination of the English proceedings, in order that Mr Malofeev's assets up to the value of US$200 million be preserved in the event that judgment in England was entered against him. VTB alleged that the principles established in TSB Private Bank International SA v Chabra and another3 applied to UTM and the Fund in that they held assets which may be used by Mr Malofeev to satisfy a judgment against him. The applicability of the Chabra decision in the Cayman Islands has long been recognised.4

On the same day as issuing the Cayman Islands Writ, VTB issued an ex parte summons seeking freezing orders against all three defendants and leave to serve the injunction on Mr Malofeev outside the jurisdiction. The matter came before Mr Justice Cresswell in the Grand Court in August 2011. The Judge refused to grant a freezing order against Mr Malofeev, and held he had no jurisdiction to permit the service of process on Mr Malofeev outside the jurisdiction given that the only relief sought against him was an interlocutory injunction. That decision was consistent with the majority of the Privy Council in the celebrated case of Mercedes-Benz v Leiduck5 and Order 11 rule 1(1)(b) of the Grand Court Rules, but seemingly overruled the then-recent Cayman Islands decision of Mr Justice Quin in Gillies-Smith v Smith6. The Judge did, however, grant interim freezing relief against the two Cayman companies albeit "not without considerable hesitation".

The decision to refuse relief against Mr Malofeev was appealed (ex parte) to the Cayman Islands Court of Appeal, where the leading decision was handed down by President Chadwick on 30 November 2011.7 The Court of Appeal upheld the decision of the Grand Court, leaving untouched the Grand Court's decision to permit freezing relief against UTM and the Fund, the Chabra NCADs.

That matter proceeded to an inter partes hearing before Cresswell J in the Grand Court in December 2011. The decision was handed down on 16 January 2012. The Judge reversed his own decision made at the ex parte hearing and decided that he did not have jurisdiction to freeze the assets of UTM and the Fund. He held that freezing relief may not be granted against an NCAD on Chabra principles in circumstances in which no substantive claim could be advanced against a CAD (in this case, Mr Malofeev) in the jurisdiction. In spite of this conclusion the Judge did permit interim freezing relief for a short period pending the granting of leave to appeal, which the Court of Appeal in due course extended pending the hearing of the appeal.

VTB appealed the decision of 16 January 2012 against UTM and the Fund only and it was this appeal that gave rise to the Court of Appeal's most recent decision.

The Decision

The Court of Appeal sat to hear the appeal on 13 and 14 February 2012. Following this hearing the interim freezing injunctions were discharged upon the giving of certain undertakings by the respondents. Judgment was handed down on 4 June 2013. On the facts of the case, no injunction was granted and the respondents were released from their undertakings.

The Court of Appeal held that there was no basis to assert that there were good grounds, on the facts of the case, that the underlying assets to which VTB sought access would become available to satisfy any judgment which VTB may obtain against Mr Malofeev in the English proceedings. This was largely due to the structure used to hold the underlying assets: the Court in particular being unpersuaded on the evidence that the BVI Court would assist by appointing a receiver (as had been claimed) to enable access to Mr Malofeev's beneficial interest in the Participating Shares in the Fund and thus to the Fund's assets. At its most prosaic level, therefore, the judgment offers some analysis of the nexus required (frequently referred to as the Cardile test, after the leading Australian decision8) between the CAD and NCAD's assets before those assets may be frozen in aid of proceedings against the CAD. This is in itself a developing area of law.

The Court of Appeal noted that its decision to refuse injunctive relief seemed to have been borne out by the events subsequent to the hearing. Following the decision of the UK Supreme Court on 6 February 2013 which upheld the English Court of Appeal's decision to set aside permission for VTB to serve its writ in the English proceedings, there were no longer any proceedings extant in which VTB was seeking substantive relief against Mr Malofeev (notwithstanding the fact that the English proceedings could not be said to have been finally determined). Thereafter, with specific reference to the English Supreme Court's decision, on 27 March 2013 the BVI Court had discharged a freezing order previously granted in favour of VTB.

Most significantly for the jurisprudence of the Cayman Islands, however, the Court of Appeal's judgment does indicate that a free-standing injunction may be granted against a Cayman Islands-based NCAD on Chabra principles where no claim is or could be advanced in the jurisdiction for substantive relief against the CAD. The Judge at first instance had been wrong to suggest that there is a bar to this relief being granted. Accordingly the refusal to freeze the assets of UTM and the Fund in the present case was made purely on the basis of the facts of the case; at law, there is no bar in principle to the freezing of assets of resident NCADs where the CAD is untouchable in the jurisdiction. The Court of Appeal helpfully set out the criteria which should be considered before such relief is available. In particular, the NCAD must be subject to the jurisdiction of the Court. The CAD need not be subject to the jurisdiction of the Court, but the substantive claim against the CAD, wheresoever it be brought or pursued, must be founded upon a cause of action recognised in the jurisdiction where the freezing order is sought.

Comment

The basic factual matrix lying behind the VTB Capital decision is common in the offshore world; namely a foreign defendant to foreign proceedings, with no connection to the Cayman Islands, is alleged to hold assets in the Cayman Islands through Cayman Islands entities which, in the plaintiff's view, could be used to satisfy a judgment obtained by him against that foreign defendant.

In such a scenario the plaintiff may well wish to freeze the assets not only of the foreign defendant, the CAD, but also of the Cayman Islands entities, the NCADs. It is however now established (pursuant to the earlier Court of Appeal decision in this case) that the claim for injunctive relief against the CAD must fail if there is no cause of action against him in the jurisdiction; and indeed leave to serve out of the jurisdiction should not be granted by virtue of Order 11 rule 1(1)(b) if the only relief sought against the CAD in the Cayman Islands is an interlocutory injunction.

But it has also been established that no cause of action need be advanced against a Chabra NCAD before his assets may be frozen – that is the very premise of the decision in Chabra itself. It is simply necessary to satisfy the Cardile test. Further, if that NCAD is resident in the Cayman Islands there is no need to invoke Order 11. The first instance decision that the NCAD's assets may only be frozen if there is a cause of action against the CAD in the jurisdiction seemed therefore to be a novel, unprecedented and artificial bar to the granting of freezing relief, and it is suggested that the Court of Appeal was correct to highlight the reasoning of the Judge at first instance as being erroneous.

That is not of course to suggest that the position following VTB Capital, albeit correct at law, is not somewhat incongruous as a matter of logic: why should the NCAD's assets be available for freezing when the CAD's own assets are not? The reason for this is, of course, that the position is not the result of co-ordinated decision making by any one law-making body. Changes in the form of a co-ordinated approach are already on the horizon in the form of the Grand Court Law Amendment Bill, which is designed to afford as a matter of statute law the right of plaintiffs to obtain free-standing freezing relief against both CADs and NCADs, even if they are outside the jurisdiction, if certain criteria are satisfied. However, until such time as this bill passes into law, the VTB Capital decision does at least provide much needed clarity with regard to the rights of plaintiffs to freeze the assets of resident NCADs.

Footnotes

1 VTB Capital plc v (1) Universal Telecom Management and (2) Universal Telecome Investment Strategies Fund SPC (CICA, 4 June 2013)

2 That is, defendants against whom no cause of action is asserted. NCADs are typically joined to proceedings in circumstances in which the Plaintiff considers the NCADs hold assets which though some process of enforcement may be used to satisfy a judgment obtained by the Plaintiff against the substantive defendant, the CAD

3 [1992] 1 WLR 231 (Ch.D)

4 See for example AHAB v Saad Investment Company Limited [2011(1) CILR 178]

5 [1996] 1 AC 284

6 (Unreported, Quin J, 12 May 2011)

7 [2011(2) CILR 420]

8 Cardile v LED Builders Pty Ltd (1999) 162 ALR 294

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.