In the recent decision of Palladyne v Upper Brook the Cayman Islands Court of Appeal (CICA) analysed the Sanctions Order which gives effect to the resolutions of the UNSC which required the freezing of Libyan state assets. Shares in three Cayman investment funds held by specified Libyan entities were frozen pursuant to the Sanctions Order. Article 10(1) prohibits dealing with a frozen asset. The CICA upheld the judgment of Segal J (see our previous article on that decision here).
Palladyne had been the investment manager and director of the relevant Cayman investment funds. The issue was whether the adoption of resolutions to appoint and remove directors (Palladyne) and to change the names of the companies was prohibited by the Sanctions Order.
Palladyne argued that the passing of the resolutions constituted a breach in that it was a “use” of frozen shares and the benefits attaching to them, or it was a change that would “enable use” of the underlying assets. The respondents emphasised that the restrictive measures in the Sanctions Order were protective and precautionary, and not penal. The purpose was to freeze assets to ensure that they were not dissipated, not to strip a person of ownership or remove all means of corporate governance.
The CICA found that the passing of resolutions did not dissipate or affect the value or character of the shares or the value of the underlying assets. The exercise of voting rights in the shareholder resolutions was not “dealing with” the funds and did not in allow access to or make a change that would enable use of the assets of the companies and therefore amount to a prohibited action:
While the principle of strict interpretation of penal legislation is an indicator of great weight, it is one of many indicators of the meaning and is capable of being displaced.
- While the court has to bear in mind the penal sanctions for contravening the provision, such measures are intended to have far-reaching effects and their legislative origin embodies a very high public interest.
- The starting point is the natural and ordinary effect of its language and context including its purpose in the light of any statutory definitions.
The meaning of “use” for which Palladyne contends could cause a complete paralysis of the corporate governance. Article 10 did not penalise preparatory steps. It is designed to prevent actual dissipation of assets.