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The Grand Court of the Cayman Islands yesterday handed down an important decision on the scope of UN, EU, UK and Cayman sanctions.

International sanctions were imposed by the United Nations in respect of Libya in 2011. The UN resolutions were given effect in the Cayman Islands through the Libya (Restrictive Measures) (Overseas Territories) Order 2011 (as amended) (“the Order”). Article 10(4) of the Order provides that, absent a licence, a person shall not “deal with” funds or economic resources which are owned, held or controlled by a person designated under the Order. It is also an offence to circumvent the Order.

Palladyne International Asset Management (“PIAM”) brought claims against three Cayman Islands investment funds (“the Upper Brook Funds”), whose assets were frozen under the Order, and their directors. PIAM’s primary case was that the term “use”, when properly interpreted, is wide enough, when it relates to shares in a Cayman company, to cover the exercise of voting rights to appoint and/or remove directors of that company.

In a judgment handed down on 5 February 2019, Justice Segal rejected this argument. The Judge held that that the prohibition on “use” of funds (in this case, shares) does not extend to cover the exercise of voting rights by a shareholder.

In providing clarification on the prohibition of “use” of funds, Justice Segal made the following points:

  1. The term “use” of the funds should be construed having regard to the language used in Article 10(4) of the Order as a whole, and the purpose of the UN sanctions regime, which was intended to preserve the assets intact, 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 (in this case, the shares) less valuable.
  2. The definitions of “funds” (as “financial assets and benefits of every kind”) and “to deal with” in Article 10(4) made clear that the sanctions legislation was concerned with the “use” of the share in its character as a financial asset. Use of the funds must be taken as referring to an activity in which the funds are employed as cash/money or liquid assets. Such activity is likely to involve a financial return being generated, or affect the value of the funds.
  3. PIAM’s wide interpretation of “use” would significantly extend the scope of the asset freeze (as established by other prohibitions) and go beyond what is necessary to achieve the purpose of the freeze. Clear and explicit language would have been needed to justify this interpretation, particularly given the serious consequences of a breach. If it had been intended that the UN Sanctions Committee would review the suitability of proposed new directors, the UN resolutions would have said so and the Order would have made provision for this in clear terms.

This is the first major decision in the Cayman Islands on international sanctions. However, the significance of the decision is far broader. The 223-page judgment of Mr Justice Segal is likely to be highly relevant to the interpretation of sanctions regimes globally.

Dinah Rose QC, Jason Pobjoy and Isabel Buchanan acted for the Upper Brooks Funds, instructed by Appleby (Cayman) Ltd.

Brian Kennelly QC and Paul Luckhurst acted for PIAM, instructed by Stewarts Law and Walkers.