Cayman Islands: Asset-Freezing Injunctions: Can Dividends To Shareholders Be “Ordinary Course” Payments?

Last Updated: 8 January 2007
Article by Jonathan S Tarboton

The Grand Court of the Cayman Islands has recently granted a Mareva Injunction in the case of KTH Capital v. China One et al against a Cayman registered company controlled by Morgan Stanley. In so doing, the Court had to grapple with the novel defence raised by the Company that, as a special purpose vehicle, the sole purpose for the Company’s incorporation was to act as a conduit for the repatriation of its shareholders’ indirect investment in a distressed debt portfolio acquired by the Company’s subsidiary in the People’s Republic of China. In these circumstances, it was argued that the distribution of dividends by the Company to its shareholders was in the ordinary course of the Company’s business and that such distributions were accordingly not liable to be restrained by Mareva Injunction.

The "ordinary course of business" exception was summarised by the English High Court in Customs & Exercise Commissioners v Anchor Food [1999] 3 All ER 268 where it said: "The Mareva Injunction jurisdiction is not to be used so as to impede or interfere with a defendant’s ordinary bona fide business transactions". Instead, the aim of a Mareva Injunction is to prevent the dissipation of assets by a defendant either with the intention of avoiding the enforceability of any judgment that may be granted against it or in a manner distinct from its usual or ordinary course of business. Consequently, the authorities demonstrate that an injunction will not ordinarily be granted in the case of a reputable trading company such as a bank or insurance broker which will need to make regular payments to its customers.

Applying this principle, in JP Morgan Multi-Strategy Fund LP and others v Macro Fund Limited and others [2002] CILR 569, the Grand Court of the Cayman Islands refused to grant a Mareva Injunction against certain mutual fund companies on the basis that the taking of investments from shareholders and the redemption of those investments was a routine part of the funds’ business and no other risk of dissipation of assets had been made out.

In the KTH Capital case, the Company argued that the sole purpose for which it had been formed was to receive profits from its P.R.C. subsidiary and repatriate these back to shareholders. As such, the Company argued that the granting of a Mareva Injunction against it would prevent it from carrying out its ordinary business of channelling funds to its shareholders from the P.R.C. KTH Capital, on the other hand, argued that the distribution of dividends could not comprise a company’s ordinary course of business since this was not part of a business but merely the means by which a company would distribute the profits generated from its business operations; its actual business was the process by which it generated such profits by, for example, investing in another enterprise (in this case, its subsidiary).

The Grand Court agreed with KTH Capital’s view, relying on an Australian Federal Court decision, Consolidated Constructions Pty Ltd v Bellenville Pty Ltd [2002] FCA 1513, in which the Federal Court, faced with a similar argument, had granted a Mareva Injunction noting that "The schemes which a debtor may devise for divesting himself of assets are legion" and that while provision should be made for a defendant’s ordinary living or business expenses, this should not allow the defendant "to bring [its] business to an end and [distribute] all of its assets, by way of dividends, at a time before its legal rights and obligations have been finally determined".

The Grand Court acknowledged that a Mareva Injunction should be moulded to interfere as minimally as possible with a defendant’s ordinary course of business and that the extent to which a Mareva Injunction would intrude on the carrying on of the Company’s business was a relevant factor for considering whether to grant a Mareva Injunction. However, the Court concluded that: "Restraining a company by Mareva Injunction from distributing dividends does not prejudice the operations of the company itself and neither does it affect the company’s business as such. The only prejudice it might have is to the shareholders because they will not receive these dividends. I do agree with Mr Walton [counsel for KTH] that the interests of the shareholders are quite irrelevant in this application."

The decision is of some importance in the Cayman Islands since a large number of Cayman registered companies are incorporated as special purpose vehicles or as holding companies for foreign shareholders’ assets and conduct no other actual business. The message from the KTH Capital case is clear: such companies’ assets (whether located in the Cayman Islands or otherwise) will not be beyond the reach of an asset preservation order such as a Mareva Injunction if the company’s assets are not genuinely used for its business purposes. In this, the Court will draw a distinction between the normal business operations of the company and those activities designed to benefit its shareholders or officers rather than the company itself.

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.

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