In a recent Alberta decision, the court was asked to recognize a foreign freezing order in a dispute worth $33,000,000.

Company Owner Transfers Funds to Cayman Islands

In June 2014, a holding company and its owner sold their shareholder interest in an oilfield construction company.

The purchaser was a Miami-based company. The holding company and its owner received approximately $60,000,000 for their combined majority interest.

The oilfield construction company subsequently brought a claim against the holding company and its owner(and the remaining shareholders) for return of a substantial portion of the monies paid. A three-year arbitration process followed. In 2019, the arbitral panel decided that there had been substantial breaches of the agreement including serious misrepresentations by the holding company’s owner.

The other minority shareholders paid their portion of the judgment. The holding company and its owner did not. Consequently, they owed, on a joint and several basis:

  • $23,924,734 under the principal award;
  • $2,564,555 under the interest award;
  • $7,064,000 under the costs award; and
  • accruing post-award interest.

Of the approximately $33,000,000 owing, the holding company and its owner had paid $4,037.

Upon receipt of their share of the purchase price, the holding company and its owner undertook a series of steps, the effect of which was to strip the holding company of its assets and move the after-tax proceeds of sale to:

  • his wife;
  • trusts and holding companies established in the Cayman Islands; and
  • other family members as gifts.

The holding company’s owner, his wife and their son then moved to the Cayman Islands.

The result was that when the arbitration panel ultimately found in the oilfield construction company’s favour in 2019, the holding company and its owner had virtually no assets available for execution. In November 2019, the oilfield construction company petitioned the Grand Court of the Cayman Islands to adjudge the owner a bankrupt, and applied to the Alberta court to have the holding company, an Alberta corporation, declared bankrupt.

On November 8, 2019, the Cayman Court granted an Interim Order under the Cayman Islands Bankruptcy Law (1997) Revision. It provided that the owner would be adjudged a bankrupt and his affairs be wound up and his property be administered under the law of bankruptcy of the Cayman Islands if he was unable to show cause to the contrary at a hearing scheduled for November 21, 2019. The owner failed to appear, even though he was present in the Cayman Islands on that date. A Continuation Order was made affirming the Interim Order.

In early 2020, the owner made a voluntary personal assignment into bankruptcy in Canada. In January 2020, the Trustees obtained a Freezing Order in the Cayman Court, prohibiting the owner’s wife from dissipating assets in the Cayman Islands and elsewhere up to a value of $20,000,000. They then applied to have the Freezing Order recognized pursuant to s. 272 of the Bankruptcy and Insolvency Act (“BIA”). The Trustees argued that jurisdiction to recognize the Cayman Freezing Order derives from the BIA and the common law. They submitted that, on either basis, recognition was necessary and equitable.

The owner and his wife argued that neither the BIA nor common law principles regarding recognition and enforcement of foreign non-monetary judgments supported recognition of the Cayman Freezing Order. They submitted that if the Trustees wanted to seek an injunction against the wife to freeze her Canadian assets, they should do so by initiating bankruptcy proceedings in Canada, and then make an application under the fraudulent preference avoidance provisions of the BIA. They claimed that to do otherwise would be to allow a Canadian court to superimpose Cayman law on a Canadian citizen.

Court Recognizes Cayman Island Freezing Order

The court began by explaining that where an order recognizing a foreign proceeding is made, s. 272(1) of the BIA confers a broad power on a Canadian court to make subsequent orders that it considers necessary for the protection of the debtor’s property or the interests of a creditor or creditors.

The court then explained that, due to a paucity of case law regarding the nature and scope of the court’s discretionary power under s. 272(1) of the BIA, it had to rely on first principles, stating:

“To begin with it seems to me that in exercising this power, the Court should be mindful of the statutory scheme of which it is a part, and the policy framework underlying that scheme. The order sought must fit fairly within that scheme and be directed at fulfilling one or more of the objectives of the BIA.

The Court should also be guided by common law precedent applying generally to enforcement of foreign non-monetary judgments.”

The court then turned to the principles set out in the Supreme Court of Canada decision Pro Swing Inc. v. Elta Golf Inc. In that case, theSupreme Court of Canada articulated the considerations to be applied and the questions to be answered as follows:

  1.   Are the terms of the foreign order clear and specific?
  2.   Is the foreign order appropriately limited in scope?
  3.   Is enforcement of the foreign order the least burdensome remedy in Canada?
  4.   Would enforcement of the foreign order expose the Respondent to unforeseen obligations?
  5.   Would third parties be affected?
  6.   Is enforcement consistent with remedies available in domestic Canadian Courts?

Additionally, the court stated that where the order being sought to be recognized is injunctive in nature, it must be satisfied that Canadian requirements for injunctive relief as set out in RJR-MacDonald Inc. v. Canada (Attorney General) have been met.

After reviewing all relevant considerations, the court ultimately found in favour of the Trustees, stating:

“Recognition of the Cayman Freezing Order in Canada was an appropriate response to the irreparable harm that would arise if the Trustees succeed in their avoidance claim but the money is nowhere to be found because it has found its way to Canada and has from here been dissipated.”

As a result, the court granted the Trustees’ application and recognized the Cayman Freezing Order.

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