The Cayman Islands Court of Appeal: Norwich Pharmacal disclosure in support of foreign proceedings

The Cayman Islands Court of Appeal: Norwich Pharmacal disclosure in support of foreign proceedings

The Cayman Islands Court of Appeal has dismissed an appeal by Essar Group against an order that they must disclose financial information to Essar’s commercial rival, ArcelorMittal, in connection with an unpaid US$1.3bn arbitration award. The ruling confirms that disclosure under the Norwich Pharmacal jurisdiction can be obtained in Cayman in support of proceedings in other jurisdictions.

Background

This long-running case arises from a 2012 agreement between Essar and ArcelorMittal Group to supply ArcelorMittal with iron ore pellets in Minnesota for 10 years. Essar breached and ArcelorMittal terminated that agreement, and in December 2017, ArcelorMittal obtained an arbitral award against Essar for US$1.3bn plus interest (now at well over US$1.5bn).

Essar ceased to participate in the arbitration from the day that the tribunal ordered it to provide disclosure. One of the two Essar companies that was party to the agreement filed a voluntary petition in the US for relief pursuant to Chapter 11 proceedings before the arbitration. The other Essar company was put into administration proceedings by directors’ resolution in its home jurisdiction of Mauritius on 26 March 2019. That was the day after the English Commercial Court upheld a worldwide freezing order and search order against members of the Ruia family who control the Essar Group in support of ArcelorMittal’s efforts to enforce the arbitral award.

According to financial statements and court-ordered disclosures, the award debtor, the Mauritian company named Essar Steel Limited (ESL), was stripped of over US$3 billion in assets between 2015 and 2018. ArcelorMittal alleged that this asset stripping was part of a wilful attempt by Essar to avoid the enforcement of the award. Essar vigorously contested the allegation saying that any movement of assets was part of a legitimate corporate reorganisation.

The Cayman proceedings

The proceedings in the Cayman Islands commenced in January 2019, when ArcelorMittal filed an application against two Essar Group companies registered in Cayman: Essar Global Fund Limited (EGFL), the principal holding company of the Essar Group, and Essar Capital Limited (ECL), the investment manager of EGFL. ArcelorMittal sought an order requiring EGFL and ECL to provide information and documents to explain the disposal of ESL’s assets.

The application was made under the Norwich Pharmacal jurisdiction, the requirements for which are well-known:

  1. a wrong must have been carried out, or arguably carried out, by an ultimate wrongdoer;
  2. there must be the need for an order to enable action to be brought against the ultimate wrongdoer; and
  3. the person against whom the order is sought must: (a) be mixed up in so as to have facilitated the wrongdoing; and (b) be able or likely to be able to provide the information necessary to enable the ultimate wrongdoer to be sued. See Mitsui & Co Ltd v Nexen Petroleum Ltd [2005] 3 All ER 511 at [21], Lightman J.

At an ex parte hearing on 15 January 2019 the Grand Court made the orders sought by ArcelorMittal. Following a contested hearing, the Court upheld the orders but reduced their ambit. Essar’s appeal of that decision is the subject of the Cayman Islands Court of Appeal judgment handed down on 3 May 2021.

The two main grounds of Essar’s appeal were:

  1. as a threshold issue, that the court had no jurisdiction to make a Norwich Pharmacal order in support of potential foreign proceedings – the “jurisdiction point”; and
  2. in relation to the first of the requirements for Norwich Pharmacal relief listed above, that there was no arguable case of wrongdoing by ESL – the “wrongdoing point”.

The jurisdiction point

Essar argued that, as a matter of principle, Norwich Pharmacal relief can never be granted if the information or disclosure sought is for the purpose of enabling the applicant to pursue foreign proceedings. This is because there is a statutory mechanism for obtaining information or documents for use in foreign proceedings, in the form of the Evidence (Proceedings in Other Jurisdictions) (Cayman Islands) Order 1978 (the Evidence Order). The Evidence Order is the instrument which gives effect in the Cayman Islands to the 1970 Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters.

Essar argued that if foreign proceedings are either on foot, or sufficiently in contemplation, then the Evidence Order applies, so as to exclude the Norwich Pharmacal jurisdiction. It also argued that in every case concerning actual or potential foreign proceedings, either (a) the Evidence Order applies and Norwich Pharmacal relief is excluded, or (b) the Evidence Order does not apply because proceedings are so speculative that they are not “contemplated” for the purposes of the Order, but Norwich Pharmacal relief is still not available. This is because it necessarily follows that the plaintiff cannot satisfy the “good arguable case” threshold for obtaining a Norwich Pharmacal order.

Applications for Norwich Pharmacal orders make up a significant part of the court caseload in the Cayman Islands and other offshore jurisdictions. Information about offshore companies is not widely available to the public – although, contrary to the popular press, it is readily available to international regulatory, enforcement and tax authorities. So in asset-tracing and civil enforcement cases it is common practice to seek an order requiring confidential disclosure from third parties such as the offshore company’s registered office provider or bank. Such information might include the company’s minute book, register of members, beneficial ownership information, past and current directors, register of charges, bank statements, etc. Obtaining such information allows a plaintiff to consider what action it might take, in what jurisdiction, and against whom. Essar’s jurisdiction argument therefore had the potential to have a very significant negative impact on the ability of private parties to trace assets and enforce court judgments or arbitral awards.

At first instance, the Grand Court held that a statutory remedy such as the Evidence Order may have the effect of extinguishing a common law remedy, but it is not necessarily the case that the Evidence Order excludes the common law Norwich Pharmacal jurisdiction in every case concerning foreign proceedings. The question is whether the statutory and common law remedies cover precisely the same ground, and the factual and legal matrix of each case shapes the analysis of that question.

Justice Kawaley held that a potential overlap would occur if the proceedings in which it is proposed to deploy the information sought had already been commenced.  However, where the plaintiff does not yet have sufficient information to determine what proceedings to commence, or where, and where there might be a risk of loss or destruction of information, the Judge held that  the statutory Evidence Order remedy would not be an effective alternative remedy that precluded Norwich Pharmacal relief.

The Court of Appeal upheld Justice Kawaley’s first instance decision, saying that the Evidence Order only concerns the giving of evidence (whether oral or documentary) for the purposes of foreign proceedings. The Court also stated that the Norwich Pharmacal jurisdiction as a matter of principle does not relate to evidence at all, but to information about wrongdoing which would allow the plaintiff to pursue further action.

Since a request under the Evidence Order must be made by the foreign court, not by the litigant, it was held that the reference to “contemplated” proceedings in the Evidence Order must be strictly interpreted to refer to proceedings in a court whose procedures allow for the taking of evidence (oral or documentary) before substantive proceedings are started. Otherwise there could never be a request by the foreign court before proceedings were actually commenced. As in this matter, there may be a clear case of wrongdoing, but the identity of the wrongdoers may not be known and, until such time as the plaintiff has that information, the plaintiff cannot ‘contemplate’ proceedings in any particular jurisdiction.

Justice of Appeal Martin, giving the leading decision, pithily summarised the Court of Appeal’s conclusion on the jurisdiction issue as follows:

“If proceedings have not been instituted in a foreign jurisdiction and are not contemplated in a jurisdiction with pre-action disclosure procedures, I cannot see a logical basis for treating the Evidence Order as impliedly excluding the Norwich Pharmacal jurisdiction: there is in the factual circumstances no overlap between the two regimes.”

The wrongdoing point

The first requirement for Norwich Pharmacal relief is that the plaintiff must show that a wrong has been carried out, or arguably carried out, by an ultimate wrongdoer. Essar argued that ArcelorMittal had failed to meet this requirement to show wrongdoing. The Court of Appeal clarified, in the light of ambiguous first instance authorities, that there must be sufficient evidence of wrongdoing to make it just to order disclosure against the respondent. That requires the plaintiff to have a case which is not merely arguability (which would include a case which was barely capable of serious argument), but that the plaintiff must have a ‘good arguable case’, in the sense laid down by Mustill J (as he then was) in the English case of The Niedersachsen [1983] 2 LI Rep 600 at 605 (lhc):

“I consider that the right course is to adopt the test of a good arguable case, in the sense of a case which is more than barely capable of serious argument, and yet not necessarily one which the Judge believes to have a better than 50 per cent chance of success”.

Applying that test to the evidence, the Court of Appeal summarised the matters relied on by ArcelorMittal in support of its application at first instance as encompassing both past and future steps to impede enforcement of the award, including:

  1. the transfer by the award debtor, ESL, of valuable subsidiaries to other companies in the Essar Group for no consideration;
  2. the implication of Essar Group companies in findings or allegations of serious wrongdoing made in foreign proceedings, suggesting a pattern of wrongdoing characterised by dealings in bad faith, a disregard for prevailing standards of corporate governance, and the transfer of assets within the Essar Group to the prejudice of creditors;
  3. the complex structure of the Essar Group, which had the effect of obscuring the manner in which assets were held within the group, to the prejudice of creditors;
  4. ESL’s failure to conduct the arbitral proceedings in good faith, in particular its failure to comply with disclosure orders and withdrawal from the proceedings; and
  5. ESL’s refusal to comply with the award.

Essar argued that, at its highest, this evidence showed that the award debtor, ESL, had a propensity to dissipate assets for the purpose of avoiding liabilities. It alleged that there was no evidence that assets had actually been dissipated for the purpose of avoiding enforcement of the award, and the mere fact of non-payment did not itself demonstrate wrongdoing. Essar contended that it was necessary for ArcelorMittal to establish a good arguable case both in relation to specific acts of dissipation, and to why such dissipation contravenes a relevant legal or equitable rule preventing disposal of the assets.

The Court of Appeal rejected this argument, saying:

“[ArcelorMittal] cannot be expected at this stage to identify every – or, indeed, any – jurisdiction in which it will seek to involve the local anti-avoidance provision. To require it to do so would be to impose too high a burden on [ArcelorMittal]: the whole point of [ArcelorMittal’s] application is that it does not at this stage have sufficient information to enable it to identify whom it might wish to pursue or where it might wish to pursue them… It is sufficient in principle for [ArcelorMittal] to establish a good arguable case of wilful evasion of the Award, since most jurisdictions will recognise that such conduct is wrongful not merely in the generic sense but in the sense of affording a remedy.”

As for Essar’s complaint that the evidence relied upon was at best historic ‘propensity’ evidence, the Court of Appeal concluded that there was enough material available to the first instance judge to establish a good arguable case of wilful evasion of the award so as to justify the grant of the Norwich Pharmacal order. Justice of Appeal Martin noted that such evidence included several arguments:

  1. the reduction in the award debtor’s assets from US$3.1 billion in 2015 to US$2.4 million in 2018;
  2. the purported writing off of a US$1.487 billion intra-group debt owed to the award debtor;
  3. an apparent attempt by the Essar Group to prefer some creditors over other by shielding bank financing from existing and potential litigants; and
  4. Essar’s conduct in the arbitration, which was capable of giving rise to an inference that it intended to frustrate the arbitration process, including enforcement of any adverse award.

It was also considered significant, at both first instance and by the Court of Appeal, that Essar’s defence and appeal were based entirely on legal arguments, with no attempt to respond to the allegations on the factual level.

Implications

Essar’s application for leave to appeal to the Privy Council, the ultimate court of appeal for the Cayman Islands, was rejected by the Court of Appeal. Essar has indicated that it will apply directly to the Privy Council for permission to appeal.

Pending determination of any such appeal, the Court of Appeal’s decision stands as a helpful statement of principle, clarifying the interplay between the statutory mechanism which gives effect to the Hague Convention and the common law Norwich Pharmacal jurisdiction. It also confirms that the relevant legal test for wrongdoing in a Norwich Pharmacal application is that of a ‘good arguable case’.

All offshore practitioners who act in asset-tracing and enforcement matters will welcome this ruling.  Private parties would be significantly restricted in obtaining the necessary information to pursue such actions, should Essar have won the case.

By Partner Paul Smith and Senior Associate Anya Park at global offshore law firm Harneys. The authors were acting and continue to act for ArcelorMittal in the Cayman proceedings.

Author: Editorial board