Vol 11 (2014) - Issue 6

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Protection of Assets in the Cayman Islands and the British Virgin Islands

For litigants and potential litigants a key consideration is the extent to which any judgment which is ultimately obtained may be enforced against the defendant. Bringing a claim against a judgment proof debtor is both futile and costly, and the risk that a debtor will dispose of its assets before proceedings can be concluded is often a real and significant issue. Generally, for money judgments, the primary enforcement mechanisms involve taking action directly against assets owned by the defendant, whether real estate, shares, cash or others. While a judgment returned unsatisfied, either in whole or in part, may assist a litigant in an action to have a liquidator appointed to the debtor resulting in a collective recovery proceeding, this will not assist an individual judgment creditor seeking to have its debt paid in the short term. A similar risk applies to claims arising out of rights in relation to assets, for example in connection with the enforceability of a particular security interest, in which there may be a risk that the subject of the claim is removed from the reach of the plaintiff before the enforcement is concluded.
Steps to protect recovery or the assets available to meet any judgment may be taken both locally (that is, in the jurisdiction in which the claim is to be made) or in another jurisdiction. For both domestic and foreign assets, the risk of dissipation or dealing is the same, namely that the defendant will attempt to thwart the litigation process by transferring or otherwise dealing with its assets. As is widely known, the primary remedy available to freeze or prevent assets being dissipated is a 'freezing order', also known as a Mareva injunction. There are other steps that can be taken depending on the nature of the asset to be protected and the jurisdiction in which the asset is located.
The courts in many common law countries have powers to make freezing orders, including for example, those in the United Kingdom, Hong Kong, the Cayman Islands and the British Virgin Islands ('BVI'). The basis for injunctions of this type is not proprietary but rather recognition by the court that a defendant to a claim may dissipate assets or otherwise seek to frustrate the judicial process. The extreme nature of the remedy has meant that Mareva injunctions have been described as a 'nuclear weapon' and such relief is not given lightly by the courts.
The purpose of this article is to give some guidance as to possible steps which may be taken by litigants in the Cayman Islands and BVI to safeguard assets located in those jurisdictions, pending the hearing of a substantive case. As the primary assets which are usually located in these jurisdictions are shares in other entities, this discussion focuses on protection from transfers of or dealings with shares, however the general discussion extends to other assets.
These safeguards may include, for example, (a) putting the local registered agent on notice of any dispute; (b) the use of a stop notice or stop order to prohibit transfers of shares; (c) injunctive relief in Cayman Islands or BVI on a freestanding basis; (d) injunctive relief within substantive Cayman or BVI proceedings; (e) the use of statutory powers to make orders in aid of foreign proceedings; and (f) the appointment of liquidators to the Cayman Islands or BVI entity which will, as a matter of statute, prevent the transfer of assets without leave of the court.