Bermudan, British Virgin Islands (“BVI”) and Cayman Islands companies are frequently used as investment vehicles for Hong Kong and Chinese companies and individuals. This is reflected in the frequency with which they are a party to Hong Kong seated arbitrations: the HKIAC’s 2021 statistics record that the BVI and the Cayman Islands were, respectively, the third and fourth most common geographic origin or nationality of parties in HKIAC arbitrations in 2021. The BVI, Bermuda and Cayman Courts frequently deal with matters ancillary to arbitrations seated in jurisdictions in the Asia Pacific region in which parties seek recovery of shares or enforcement of damages claims against assets in those offshore jurisdictions. This article discusses the key offshore litigation tools available to parties in Hong Kong arbitrations, with reference to recent developments in the law in Bermuda, BVI and Cayman.
1. Interim Relief
Whilst most sophisticated national arbitration laws (including Hong Kong) and institutional rules will empower tribunals to grant interim measures, parties may need to turn to the offshore courts if: (i) they require protective measures against an offshore entity before a tribunal is constituted; (ii) relief is required against an offshore entity that is not party to the arbitration; or (iii) there are concerns about enforcing an interim order in an offshore jurisdiction.
Freezing injunctions may be granted by the Courts in all three jurisdictions to preserve assets that are the subject matter of Hong Kong arbitrations (often being shares in offshore companies) pending the outcome of arbitral proceedings. An injunction may be obtained if is a real risk of dissipation or a need to maintain the status quo, there is a good arguable case on the merits, the arbitration award is capable of being enforced in the relevant jurisdiction, the applicant would not be protected adequately by an award of damages and the defendant would be compensable by an award of damages if successful. (See section 43(2) of the BVI Arbitration Act; section 54(1) of the Cayman Arbitration Act and section 11a of the Grand Court Act (2015 Revision); and section 35(5) of the 1993 Bermuda International Arbitration and Conciliation Act.) An undertaking in damages is typically required and, if losses are reasonably foreseeable if the injunction is granted and the claimant is outside the jurisdiction or does not have sufficient assets within the jurisdiction, the relevant Court may require the undertaking to be fortified for the amount of loss the defendant is likely to suffer if the injunction was wrongly granted. No substantive cause of action needs to be available against the respondent in the relevant offshore jurisdiction to pursue a freezing injunction. Ancillary asset disclosure orders are also typically sought with freezing injunctions to obtain information about a defendant’s assets.
The Courts in Bermuda, BVI and Cayman may also exercise a common law jurisdiction to grant Chabra injunctions over the assets of a person against whom a claimant in a Hong Kong seated arbitration has no direct cause of action. The requirements for Chabra injunctions have recently been the subject of clarification and development in a judgment of the Judicial Committee of the Privy Council (the final court of appeal of inter alios Bermuda, the BVI and Cayman) in the BVI case of Broad Idea v Convoy Collateral [2021] UKPC 24. In his majority judgment, Lord Leggatt noted that: “There could, in an appropriate case, be power at common law […] to grant an interim or Mareva injunction against a defendant properly served within the jurisdiction, where there was […] a sustainable claim on Chabra grounds that the defendant within the jurisdiction is the creature or money box of a defendant against whom there is an actual or threatened foreign claim or arbitration.”
Where there is concern about unauthorised dealings in shares, a simple protective measure for persons with a beneficial interest in those shares is to file a “stop notice” at the BVI or Cayman Court (as applicable). A stop notice does not prohibit dealings in the shares but would notify the applicant when a transfer is proposed thereby enabling the interested party to take steps to protect their proprietary interest (for example by obtaining a stop order from the Court which prohibits dealing in the shares).
2. Third Party Disclosure Orders: Norwich Pharmacal and Bankers Trust Relief
Norwich Pharmacal and Bankers Trust orders are powerful tools to assist with asset tracing and enforcement of arbitral awards and judgments, requiring a third party – often corporate services providers and banks – to disclose information, even where that information would otherwise be confidential.
Norwich Pharmacal relief compels third parties to disclose information to assist the applicant in bringing legal proceedings against individuals who are believed to have wronged the applicant. An applicant must demonstrate: (1) an arguable case that there has been wrongdoing; (2) that the disclosure sought is necessary to enable it to seek redress for the wrongdoing; and (3) that the respondent is likely to be able to provide the information sought and is ‘mixed up’ in the wrongdoing, innocently or otherwise.
The offshore courts have confirmed the existence of the jurisdiction to grant Norwich Pharmacal relief in aid of foreign proceedings and have demonstrated their willingness to use this tool in a flexible way to assist victims of wrongdoing.
For example, the Cayman Islands Court of Appeal in Essar Global Fund and Essar Capital Limited v Arcelormittal USA LLC (CICA, unreported, 3 May 2021) has confirmed that disclosure under the Norwich Pharmacal jurisdiction can be obtained in support of foreign proceedings. The respondents argued that the Evidence (Proceedings in Other Jurisdictions) (Cayman Islands) Order 1978, which confers statutory jurisdiction on the Cayman Court to respond to requests from foreign courts for oral and documentary evidence to be used in foreign proceedings which are pending or contemplated, provides the exclusive means of obtaining information or documents for overseas litigation. The Cayman Court considered the reasoning of the English courts in Ramilos Trading Ltd v Buyanovsky and R (Omar) v Secretary of State for Foreign Affairs which both concluded that common law remedies, such as the Norwich Pharmacal jurisdiction, were precluded once concurrent legislation was engaged as a Norwich Pharmacal application could be used to “subvert the carefully calibrated statutory scheme”. The Cayman Islands Court of Appeal ultimately upheld the flexible approach finding that legislation dealing with the giving of evidence in foreign proceedings did not impliedly exclude a common law jurisdiction to make a Norwich Pharmacal order for the provision of information necessary to enable foreign proceedings: “so long as care is taken to confine the Norwich Pharmacal jurisdiction to its proper scope, there can in principle be no overlap between that jurisdiction and the statutory regime relating to evidence in foreign proceedings, and accordingly no reason to regard the former as excluded by the latter”.
The Essar Global decision is in keeping with recent decisions in other offshore jurisdictions including the BVI where the BVI Commercial Court also declined to follow Ramilos and Omar in the case of K&S v Z&Z BVIHC (COM) 2020/0016.
In K&S v Z&Z the BVI Commercial Court confirmed the availability in the BVI of Norwich Pharmacal relief in support of foreign civil and arbitral proceedings. In this case, information was sought from the registered agents of the BVI companies in aid of eventual enforcement both outside and in the BVI, to render a freezing order previously granted by the BVI Court effective and for use in proceedings before an arbitral tribunal. The Court classified Norwich Pharmacal orders as a type of injunction and BVI Courts thus have the jurisdiction pursuant to the Supreme Court Act to grant such orders where it is just or convenient to do so. The BVI legislature has now addressed the issue by introducing a statutory provision putting the Norwich Pharmacal relief in support of foreign proceedings on a statutory footing with the enactment of section 3 of the Eastern Caribbean Supreme Court (Virgin Islands) (Amendment) Act 2020.
A Bankers Trust order, an equitable remedy similar to, but distinct from, Norwich Pharmacal orders, is available from inter alios the Bermuda, BVI and Cayman Courts against third parties in circumstances where a prima facie case of fraud or breach of trust has been made out and the information is required to recover, trace, or preserve assets that are the subject of a proprietary claim. This remedy requires a third party to provide information which might ordinarily be protected by the duty of confidentiality; for example, to verify the origin and destination of payments into and from a bank account. Bankers Trust orders may be granted as an interim measure where an applicant seeks to trace funds which are the proceeds of fraud and delay might result in dissipation.
As in other jurisdictions, gagging orders are typically granted in conjunction with Norwich Pharmacal or Bankers Trust orders, restraining the third party against whom an ex parte discovery order is made from communicating with the intended defendant regarding the disclosure order.
3. Enforcement Strategies
There are two particular scenarios where an enforcement strategy following an award in a Hong Kong seated arbitration is likely to involve offshore elements: (1) where a proprietary interest in an offshore company is established by an award; and (2) where an award for damages may be enforced against assets held offshore (frequently shares held in another offshore company.)
Once an award has been recognised, an effective strategy for enforcement against shares in offshore companies is to obtain charging orders over those shares. The judgment creditor can then enforce the judgment by obtaining an order for sale of the charged property and the debt can then be satisfied out of the sale proceeds. The Cayman Court will have ultimate oversight of the sales process. Sometimes the Cayman Court makes brief and conclusive orders for direct sale of shares without giving further directions. However, the Cayman Court may give further directions for a sales process, potentially including the appointment of independent accountants (who would have their own legal counsel) to conduct the sale. Very recently, in the matter of Top Jet Enterprises Limited v Sino Jet Holding Limited & Ors in a judgment dated 3 August 2021, Cayman Court gave detailed directions for a sales process conducted by independent accountants following the making of a final charging order in connection with the enforcement of a foreign arbitral award
Alternatively, it may be expedient to appoint a receiver rather than seeking an order for sale of shares in circumstances where a sale of the shares would result in a discounted recovery, prejudicing both the judgment creditor and judgment debtor, because the value of the underlying assets was unknown. By contrast, a receiver appointed over shares can use its power to realise value from the shares by appointing directors to the company’s board who can then take steps to sell the company’s assets in order to satisfy the judgment debt. Walkers successfully deployed this strategy representing the claimant on the first occasion where the BVI court recognised a PRC judgment (See Industrial Bank Financial Leasing Co Ltd and Xing Libing (BVIHC (COM) 0032 of 2018)). Following recognition in that case, the BVI Court subsequently granted charging orders and appointed receivers to recover assets, including assets in Hong Kong.
4. Parallel Proceedings
Parties are free to decide where they will resolve any dispute between them, subject to public policy and statutory considerations. Where parties have agreed to the resolution of disputes by arbitration generally speaking they will be held to their bargain. An arbitral tribunal is not able to make a winding up order in respect of an offshore company, however, and there is often a tension between statutory provisions which give the offshore courts exclusive jurisdiction to make a winding up order, and agreement by members of the company to resolve disputes by arbitration. The BVI, Bermuda and Cayman Courts would likely permit a winding up petition on an insolvency basis to proceed unless they can discern a bona fide dispute on substantial grounds that falls within the ambit of the arbitration clause, in which case the matter would be stayed to arbitration. The position in relation to members wishing to pursue a winding up petition notwithstanding an arbitration agreement is more nuanced and is the subject of an increasing body of case law.
Conclusion
With the consistent popularity of offshore companies in Hong Kong and Mainland China, there will continue to be a need for offshore solutions when disputes occur, including when latent disputes fall within the ambit of an arbitration agreement specifying Hong Kong as the seat. The BVI, Bermuda and Cayman Courts have many tools that can be deployed in support of Hong Kong arbitration such as stand-alone freezing orders, Norwich Pharmacal orders and enforcement orders where parties or assets in dispute have an offshore nexus.
