20 August, 2020
In a recent judgment of the Grand Court1, Kawaley J confirmed the Court’s jurisdiction to extend the definition of “assets” in a worldwide freezing order to include those assets held directly and/or indirectly by a party through its subsidiaries, as well as confirming the power of the Court to order full ancillary disclosure of those assets.
- There is no objection in principle to identifying a specific asset in a freezing order despite no proprietary claim being pursued.
- The Court may extend the standard definition of assets in a freezing order to include other assets which may be held in the name of a third party but are assets in which a defendant is legally otherwise interested and over which the defendant has control (in this instance subsidiaries). The effect of deploying the extended definition of assets necessarily means that no freezing of third-party assets occurs at all. This is the legal function of extending the definition of the defendant’s assets.
- There may be occasions where a freezing order could be expressed by the Court to apply to the assets of a company falling outside both the standard and extended definition of assets (in effect piercing the corporate veil), however, it is a jurisdiction to be exercised only exceptionally, for example, where impropriety can be shown in the sense of a misuse of the company device or facade to conceal wrongdoing.
- While the Court has jurisdictional competence to order a party to produce documents about the assets of its subsidiaries, such disclosure is the exception to the rule, and should only be ordered in exceptional circumstances.
- On 8 May 2020, the Court granted an ex-parte Worldwide Freezing Order (“WFO”) in favour of the Plaintiffs against the Defendant. The Plaintiffs represented various bondholders who had subscribed to a bond issue in the Defendant, Luckin Coffee, in January 2020.
- The WFO had been sought by the Plaintiffs following the Defendant issuing a press release announcing an internal investigation into certain improprieties including the falsification of transactions in the last quarter of 2019 to the value of RMB 2.2 billion (US$318 million), as well as the Plaintiffs’ concerns that the proceeds of the bond sale (“Bond Proceeds”) would be transferred from off-shore accounts to accounts held directly/indirectly by the Defendant in the People’s Republic of China, effectively placing them out of reach of the Plaintiffs.
- Following the granting of the WFO, the Defendant filed a Summons seeking orders, among others, that any disagreements between it and the Plaintiffs as to the interpretation, effect and scope of certain provisions of the WFO be determined at the hearing between the parties on the Return Date, with the remaining disclosure obligations of the Defendant (if any) to be stayed pending the conclusion of the proposed hearing.
- These matters were subsequently determined by the Court prior to the Return Date at a hearing that took place on 25 May 2020 (the “Disclosure Hearing”).Relevant provisions of the WFO
- The primary provision of the WFO read as follows:“1. Until further order of the Court, the Defendant must not remove from the Cayman Islands or in any way dispose or deal with or diminish the value of any of its assets whether they are in or outside the Cayman Islands, whether in the Defendant’s own name or not, whether the Defendant is interested in them legally or otherwise, and whether solely or jointly owned, up to a value of US$160,701,850.”
- The effect of this extended definition of assets was clarified in paragraph 5 of the WFO which relevantly stated that:“5. Paragraph 1 above shall apply to:
- All of the Defendant’s assets which the Defendant has the power, directly or indirectly, to dispose of or deal with as if it were the Defendant’s own, whether or not the assets are in the Defendant’s own name, whether the Defendant is interested in them legally or otherwise, and whether they are solely or jointly owned. The Defendant is to be regarded as having the power, directly or indirectly, to dispose of or deal with an asset as if it were the Defendant’s own if, inter alia, a third party holds or controls the asset in accordance with the Defendant’s direct or indirect instructions; and
- The Defendant’s directly-owned shareholdings, partnership interests and/or investments in other companies and entities (as well as any control it might be entitled to exercise over any variable interest entities in the People’s Republic of China) and all rights, powers and interests that such shareholdings, partnership interests and/or investments (as well as rights of control) may afford it in respect of any and all of the assets (including but not limited to shareholdings) of the Defendant’s indirectly-owned subsidiaries and variable interest entities.”
- Finally, the controversial disclosure obligations were primarily set out in the following provisions of the WFO:“7. Within three business days of this order, the Defendant must:a. Inform the Plaintiffs’ attorneys in writing of:i. The current location of the Bond Proceeds (including contact details of any person having legal custody or control of the Bond Proceeds).ii. The value, location (including contact details of any person having legal custody or control of the assets), and details of all of the Defendant’s assets located in the Cayman Islands above the value of US$10,000 and worldwide above the value of US$1 million (for these purposes ‘asset’ has the meaning given to it cumulatively by paragraphs 1 and 5 above)…8. Within five business days of this order, the Defendant must:
- Confirm the information in paragraph 7 above in an affidavit by a director of the Defendant served on the Plaintiffs’ attorneys;
- Provide the Plaintiffs’ attorneys with copies of all bank statements evidencing the location of the Bond Proceeds, which must show the statement of the bank accounts as at the date of this Order;
- Provide the Plaintiffs’ attorneys with bank account details and current balances of all bank accounts in the name or held on behalf of the Defendant or its directly or indirectly controlled subsidiaries and group companies listed in Schedule 3 to this Order; and
- Provide the Plaintiffs’ attorneys with the value, location (including contact details of any person having legal custody or control of the assets), and details of all of the Defendant’s assets located in the Cayman Islands above the value of US$10,000 and worldwide above the value of US$1 million (for these purposes ‘asset’ has the meaning given to it cumulatively by paragraphs 1 and 5 above)…”
- At the hearing, the Defendant’s counsel outlined what was described by the Court as a “dense thicket of issues” to be considered, however, these was helpfully summarised by the Court as follows:
- Whether the WFO could properly be read as applying to specific assets (the Bond Proceeds) in the absence of a proprietary claim and/or in light of the disclosure already provided by the Defendant, whether further disclosure be dispensed with altogether or pending the return date of the WFO (the “Return Date”);
- Whether the WFO ought to properly have adopted the extended definition of assets; and
- Whether the WFO could properly be read as requiring the Defendant to provide disclosure about the assets of the Defendant’s direct and indirect subsidiaries and/or whether this disclosure should be dispensed with or pending the Return Date.
- With respect to whether the WFO could be read as applying to the Bond Proceeds in the absence of a proprietary claim, the Court noted (almost in passing) that it had been satisfied by counsel for the Plaintiffs at the time of making the WFO that there was no objection in principle to identifying specific assets in a freezing order (despite no proprietary claim being pursued).
- Moving to the question as to whether any further disclosure was warranted, the Court began by pointing out that paragraph 2 of the WFO had presupposed that the Bond Proceeds constituted an identifiable fund (based on the information available to the Plaintiffs at the time of seeking the order). As a result, the consequent disclosure by the Defendant that the Bond Proceeds did not constitute a segregated fund, and that the funds had been comingled with other assets upon receipt and had thereafter been transferred, was found to be potentially relevant to whether, and if so to what extent, further disclosure was required in the short period before the Return Date.
- In his submission as to why further disclosure with respect to the Bond Proceeds should not stand, counsel for the Defendant referred to the English High Court decision in CPOD SA -v- De Holanda Hr et al  1247 Ch, where the Court opined as follows:
“51…So far as I can tell from the authorities, it is normally only when a proprietary freezing order is sought that it may be coupled with an ancillary disclosure order requiring information to be provided by the defendants as to what has happened to the assets claimed to be beneficially owned by the claimant.”
- In circumstances where the Plaintiffs were only seeking damages in aid of a personal claim, and the Bond Proceeds were said to no longer exist (having been comingled and dissipated with other funds), it was submitted that no further disclosure was warranted, or at the very least, should be suspended until the Return Date, at which time the Court would determine whether the WFO should be continued.
- In agreeing with the Defendant’s counsel, the Court held that it would not be appropriate to require the Defendant to make any further disclosure about the Bond Proceeds pending the Return Date due to:
- The connection between the information sought and the assets frozen by the WFO, based on the material before the Court (i.e. that the Bond Proceeds had been dissipated), was “legally tenuous and/or intelligible and incapable of being fairly complied with”; and
- (further, and in any event) declining to order further disclosure at this stage would not render the WFO nugatory, having regard to the disclosure already given.
- While the question as to whether the WFO should have adopted the extended definition of assets was only addressed in passing (with the Defendant’s main objection being with respect to producing information about non-party subsidiaries), the Court was determined to address the issue nonetheless, in considering it to be an “important point of practice not seemingly addressed in local case law.”
- The Court then began by considering what factual findings were required to justify deploying the “extended definition”, however, found that on a proper analysis, it appeared that no evidential test need be met if an application for injunctive relief wants to deploy the extended definition. On that basis, the Court suggested that the “justification for invoking the extended definition will perhaps often only arise in the context of enforcing a freezing order or seeking ancillary relief”.
- This reasoning was said to emerge from the most relevant cases referred to by counsel for the parties, which had been helpfully summarised in the English High Court decision of FM Capital Partners Ltd v Marino  EWHC 2889 (Comm), where Peter MacDonald Eggers QC (sitting as a Deputy High Court Judge), established that following the Supreme Court’s decision in JSC BTA Bank v Ablyazov2, the correct position was that in order to deploy the extended definition, the asset in question must be one over which the respondent had control, in addition to having some legal and/or beneficial interest (emphasis added).
- The rationale to include such assets was described by Eggers as follows:
a company in which he or she is the only or principal shareholder, that conduct may have the effect of diminishing the value of the respondent’s shareholding in the company, and as that shareholding is an asset which is captured by the freezing order, such conduct may be enjoined by the freezing order..”3
- In rejecting the Defendant’s submission that assets of wholly owned companies of a defendant not before the Court could only be frozen if they were “in truth no more than pocked or wallets of that respondent”4, the Court noted that on a proper reading of FM Capital Partners, two different tests for two different types of restraint were evident:
- Firstly, a “control” test which triggers the application of an extended definition of assets (using a form of wording which is standard in the English Commercial Court) to include assets controlled by the defendant (as described above); and
- Secondly, an exceptional, veil-piercing, test (emphasis added) applicable to an order designed to freeze assets of non-party companies owned by a defendant, which assets fall outside of a standard and extended definition of assets of the defendant.
- In clarifying that the effect of deploying the extended definition of assets necessarily meant that no freezing of third-party assets occurs at all, the Court dismissed the notion that the adoption of an extended definition was paramount to piercing the corporate veil of a party’s subsidiaries. More particularly, the Court made clear that it is only if assets not falling within the extended definition (i.e. not controlled by the defendant) and belonging to third party companies owned by the defendant are frozen, that what may be described as piercing the corporate veil occurs.
- In conclusion, the Court confirmed that there can be no objection in principle to restraining a party in a freezing order from disposing of, otherwise than in the ordinary course of business, its own assets as defined both on a standard and extended definition. Importantly, the Court confirmed that the English standard and extended definition of assets should be regarded as uncontroversial in the Cayman jurisdiction and that a party should have little difficulty in identifying what assets if any, fall within the extended definition, “assuming the corporate structure is not a sham and that it is the exception rather than the rule that it treats assets legally owned by its subsidiaries as if they were its own.”Whether the WFO could properly be read as requiring the Defendant to provide disclosure about the assets of the Defendant’s direct and indirect subsidiaries
- Having confirmed the power of the Court to extend the definition of assets, Kawaley J turned to what he considered to be the key question on the Defendant’s application, that being; whether there is a sufficiently cogent case for, not just restraining the dissipation of the Defendant’s assets broadly defined, but also imposing ancillary disclosure obligations which extend beyond the terms of paragraph 8 of the WFO(emphasis added), which stated that:“(c) Provide the Plaintiffs’ attorneys with bank account details and current balances of all bank accounts in the name or held on behalf of the Defendant or its subsidiaries directly or indirectly controlled subsidiaries and group companies listed in Schedule 3 to this Order.”
- This was described by the Court as involving two opposing exercises; one weighing the factors for and against including a legally permissible ancillary provision in a freezing order, and the other entailing the disapplication of a fundamental substantive rule law, that being the doctrine of separate corporate personality.
- In rejecting the Plaintiffs’ submission that disclosure of financial information relating to the Defendant’s subsidiaries assets could, without more, be justified by reference to a combination of the facts that (a) the extended definition of assets was appropriate for the freezing order, and (b) the Defendant had effective control over the subsidiaries’ financial information, the Court held that such generic facts do not by themselves support an entitlement to disclosure of the controlled subsidiaries’ assets. This was especially so where no real distinction was to be made between those assets and the Defendant’s own assets.
- However, the Court found there to be “little doubt” that, in appropriate circumstances, it does have jurisdictional competence to order a party to produce documents about the assets of its subsidiaries to police the freezing portions of a freezing injunction (emphasis added). Although, the Court made clear that this did not always follow that disclosure of such information was necessarily appropriate as a matter of legal principle and/or practical need, even when it is clear that the dissipation of a subsidiaries’ assets will diminish the value of the Defendant’s assets.
- In subsequently addressing the question as to when it will be appropriate to make such an “intrusive order”, the Court referred to the observations of Gloster J in JSC VTB Bank v Shurihin  EWHC 3116 (Comm), which it said confirmed its view that the ordering of the production of information about the assets of subsidiaries should be considered an “exceptional course” to take. More specifically, the Court referred to the “careful balancing act” that must be carried out to assess whether there is specific evidence which displaces the starting assumption that ancillary disclosure will not be ordered about the assets of indirectly relevant non-party subsidiaries.
- In the present circumstances, while finding that the Plaintiffs had in fact established a basis for the Court to potentially order ancillary disclosure in relation to the assets of the Defendant’s non-party subsidiaries, the Court was not prepared to grant such an order in circumstances where a full inter partes analysis of the WFO was to be shortly undertaken, as well as the fact that the Plaintiffs had failed to establish that the ancillary disclosure sought would be rendered nugatory if their entitlement to such relief was suspended pending the inter partes hearing.
In conclusion, while the Court declined to grant the ancillary disclosure sought by the Plaintiffs in advance of the Return Date, it importantly confirmed that it was within its jurisdiction to do so, as well as setting out the considerations to be taken into account whenever a party seeks such a wide-ranging order.
Broadhurst LLC is a boutique offshore litigation firm with over 30 years’ experience in the Cayman Islands. We have a strong history of successfully obtaining injunctive relief to protect the interests of our clients and are regularly instructed on behalf of creditors, liquidators and receivers.
For further information on this decision or assistance with the obtaining of injunctive relief, please reach out to one of the authors of this publication.
1 Linden Capital LP & Ors v Luckin Coffee Inc (Unreported, FSD82/2020, 4 June 2020)
2  1 WLR 4754
3 FM Capital Partners Ltd v Marino  EWHC 2889 (Comm) per Eggers P at .
4 Adopting the example given by Hildyard J in Group Seven Ltd v Allied Investment Corpn Ltd.  EWHC 1509 (Cth)