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Industry Updates

Palladyne:Application of UN and EU Sanctions in the Cayman Islands

22 Mar 2019

Judicial decisions on the application of UN and EU sanctions are few and far between, particularly in offshore jurisdictions.  The recent decision of the Grand Court of the Cayman Islands in Palladyne International Asset Management B.V. v Upper Brook (A) Ltd. & Ors, which analyses the effect and scope of the asset freeze in respect of Libya, is therefore not only a welcome development but one that will have general application to the interpretation of the nearly 30 sanctions regimes currently in force under Cayman Islands and BVI law.

UN and EU sanctions are extended to the Cayman Islands, BVI and other UK Overseas Territories by statutory instrument.  Such 'Sanctions Orders' apply to all Cayman Islands and BVI entities, and most contain an asset freeze on the funds and economic resources owned, held or controlled (in)directly by 'Designated Persons', i.e. those subject to applicable sanctions, or persons owned or controlled by them.  The terms of the asset freeze generally prohibit dealing with such assets, as well as making them available (in)directly to or for the benefit of a Designated Person. 

Where the frozen assets are shares or units in Cayman Islands or BVI entities, the question has often arisen as to whether the asset freeze applies to all rights attached to those interests, including voting rights.  The question arises because the prohibition on 'dealing' under the Sanctions Orders includes a prohibition on the 'use' of the frozen assets.         

In Palladyne, the Grand Court was asked to determine this issue in the context of former Designated Persons voting on shares they held in three Cayman Islands investment funds in order to remove a director.  Segal J held that:
  • The prohibition on the 'use' of the shares had to be construed with regard to the language of the relevant articles of the Sanctions Order, understood by reference to and in the context of the UN sanctions regime, the principal purpose of which was to preserve the value of frozen assets for the ultimate benefit of the Libyan people.

  • The exercise of voting rights to change a director does not constitute a 'use' of the frozen shares.  The Sanctions Orders are concerned with shares in their character as financial assets.  The prohibition on 'use' only refers to activities in which the frozen assets are employed as cash / money or liquid assets, e.g. activity that is likely to involve the generation of a financial return or affect the monetary value of the frozen assets.

  • To hold otherwise would significantly extend the scope of the asset freeze and go beyond what is needed to achieve its purpose.  Clear and explicit language, not currently within the Sanctions Orders, would be needed to justify that result.

 This decision provides welcome clarity to this issue.  Given that Segal J held that the international sanctions regime should be read as a single harmonious code, the decision is also relevant to the interpretation of UN and EU sanctions generally as well as the implementing UK legislation.

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