PIAM v Upper Brook (A) Ltd & Ors: Important decision on scope of UN and EU sanctions

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 proper directors. PIAM’s primary case was that the term “use”, when properly interpreted, is wide enough, when it relates to “funds” which are shares in a Cayman company, to cover the exercise of voting rights to appoint and/or remove directors of that company.

In the decision of PIAM v Upper Brook (A) Ltd & Ors handed down today, Justice Segal has held that the prohibition on “use” of funds (in this case, shares) does not extend to cover the exercise of voting rights by a shareholder.

If PIAM’s wide interpretation had been found to be correct, this would have had significant implications for the corporate governance of companies whose assets are frozen by international sanctions and would have led to perverse outcomes. If correct, a shareholder of a company would be unable to exercise any of the rights attaching to that share, without first obtaining a sanctions licence. This would have resulted in an unworkable and oppressive sanctions regime, requiring a licence to be obtained for every matter of corporate governance, however mundane, such as changing the name of the company.

The Upper Brook Funds successfully argued that PIAM’s interpretation of the prohibition on “use” of shares would have been contrary to the plain and ordinary meaning of the legislation and inconsistent with the object and purpose of the asset freeze. The aim of the sanctions regime was to prohibit the dealing with (including “use of”) funds as financial assets. In the context of a share, this means buying it, selling it, trading in relation to it, or raising money using it as security; the prohibition is not concerned with the exercise of voting rights attached to and inherent in the ownership of the shares.

In providing helpful 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. Furthermore, 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.

Justice Segal also rejected PIAM’s alternative argument that the exercise of voting rights by the shareholders to remove and/or appoint new directors made a change that would “enable use” or “allow access” to the underlying assets of the Cayman Funds. The particular issue at hand was whether votes to remove and replace directors of the Upper Brook Funds had involved breaches of international sanctions. The Funds had received some USD 700,000,000 of investment of Libyan Sovereign wealth. In addition to arguing that shares had been used in breach of sanctions, PIAM argued that the shares had been unlawfully dealt with by making a change that would allow access to the underlying investments or enable their use. Both of these arguments were rejected on the basis that a mere change of control over the company by replacing its directions neither allowed access to the underlying investments or enabled their use.

This is the first major decision in the Cayman Islands on international sanctions. However, its significance is not limited to Cayman Islands law and the interpretation of the prohibition on “use” in Article 10 of the Order. Justice Segal found that the international sanctions regime (UN, EU, UK and Cayman) should be read a single harmonious code. This decision will therefore be highly relevant to the interpretation of UN and EU sanctions globally as well as UK domestic legislation implementing international sanctions.

Appleby (Cayman) Ltd represented the Upper Brook Funds and Dinah Rose QC appeared for them as counsel at trial.