Cayman Court provides valuable guidance on dealing with frozen assets under Libyan sanctions
InPalladyne International Asset Management B.V. v Upper Brook (A) Ltd and Others, the Grand Court of the Cayman Islands issued important judicial guidance regarding the extent to which the dealing restriction under the Libyan sanctions regime was applicable in the Cayman Islands. In particular, the court was asked to examine the scope and meaning of the restriction on the ‘use’ of funds frozen under the Libya (Restrictive Measures) (Overseas Territories) Order 2011 (theLibya OT Order).
The (defeated) argument
In short, Palladyne’s position was that the exercise of voting rights to remove and replace directors of three Cayman Islands funds (the Upper BrookFunds), whose assets were frozen under the Libya OT Order, would involve breaches of the dealing restriction in Article 10 of the Libya OT Order.
Under the Libya OT Order, relevantly:
- Article 10(1) provides that without a licence from the competent authority, which in Cayman is the Minister of Finance, it is prohibited for a person to deal with funds or economic resources owned or controlled by a “designated person” or persons acting on their behalf; and
- Article 10(4) specifies that “to deal with” in respect of funds will include “to use, move, allow access to or transfer”.
While the Upper Brook Funds where not themselves designated persons it was generally accepted that they had received investment from Libyan sovereign wealth funds, which were designated persons, and consequently the assets of the Upper Brooks Funds were subject to the restrictions in (1) and (2) above.
Palladyne’s argument was that Article 10(4) necessarily widened the ambit of the dealing restriction with respect to frozen assets by the word “use”. It followed that the mere exercise of voting rights by shareholders to change directors would necessarily cause a breach as this would constitute ‘using’ frozen assets (ie the shares in the Upper Brooke Funds).
It is clear that to make good their arguments, Palladyne took a more literal approach to interpreting the term “use” in the legislation.
The (successful) argument and the court’s view
The Upper Brook Funds countered by averring that Palladyne’s interpretation was contrary to the plain and ordinary meaning of the legislation and would be inconsistent with the object and purpose of the asset freeze. They argued that the prohibition on the dealing with funds, in context of shares, related to buying, selling, trading, or raising money by use of them as security, but should not extend to the exercise of voting rights attaching to them.
Plainly the Upper Brook Funds took a more purposive approach to interpreting the word “use” in the legislation.
Justice Segal, who heard the case, agreed with the Upper Brook Funds. According to the judge the term “use” should be construed having regard to the language used in Article 10(4) of the Libya OT Order as a whole, and the purpose of the UN’s sanctions regime which is to preserve the frozen assets, so that they can eventually be returned to the Libyan people. The asset freeze was designed to prevent any action being taken which would make the asset (ie the shares) less valuable.
The learned judge also referred to the definitions of “funds” and “to deal with” within the Libya OT Order. Taken together the Justice Segal makes it clear that the Libya OT Order is concerned with the “use” of funds (in this case shares) as a financial asset rather than with a view to the exercise of certain rights which are attached to such securities. Palladyne’s interpretation would therefore widen the scope of the dealing restriction impermissibly far.
Harneys’ reflections on the case
The ruling is significant not so much because it is the first of its kind in the Cayman Islands but rather because it provides helpful guidance from a court of law subject to UK sovereignty regarding the meaning of terminology common to almost all UK/EU-derived sanctions regimes – ie what does it mean to ‘use’ assets subject to the dealing restriction.
This judgment is consequently of direct relevance to other UK Overseas Territories, such as the British Virgin Islands, Anguilla and Bermuda – which also adopt the Libya OT Order as local law. Furthermore, it is also plainly relevant to the dealing restrictions beyond the Libya OT Order and those affecting, for example, regimes covering Russia/Ukraine, Iran, etc. It could even be argued that it has a bearing upon the interpretation of the sanctions regimes in the UK and EU, on which the Libya OT Order is loosely based.
Further, the emphasis by the court on the character of funds as ‘financial assets’ is helpful as it clarifies that simple corporate governance measures taken in respect of frozen shares, such as changes to composition of the board, should not require prior approval of the relevant competent authority. The decision of the Justice Segal to favour the more purposive interpretation of the Upper Brook Funds rather than Palladyne’s more literal view is also, in our view, consistent with the more general body of law emerging in sanctions cases beyond the Cayman Islands.
If you have any questions, please contact Harneys’ Financial and Economic Sanctions team or your usual contact.
 5 February 2019.
 The Libya OT Order is an ‘Order in Council’ issued by the UK in respect of its Overseas Territories, including the Cayman Islands, as well as other jurisdictions we cover such as the British Virgin Islands, Bermuda and Anguilla. The Order implements, on behalf of the Overseas Territories, the UK’s obligation under the United Nations Security Council framework to impose sanctions on certain Libyan entities and individuals.