On 29 January 2016, Bermuda's Supreme Court handed down its ruling in Cornhill Natural Resources Fund Limited v Libyan Investment Authority, et al,  SC Bda 9 (Com), a case concerning the meaning and effect of the Libya (Restrictive Measures) (Overseas Territories) Order 2011. It is the first ruling by a court on sanctions legislation affecting the offshore world.
Around the world, onshore and offshore statute books are filling-up with a bewildering array of sanctions regimes. Sanctions legislation is, in general, aimed at international business in order to isolate regressive regimes from the international economy. Such legislation naturally impacts offshore businesses, in particular insurers and hedge funds.
The Cornhill case shows some of the practical difficulties which businesses must grapple with when dealing with sanctions legislation and it shows the benefits of seeking court guidance at an early stage.
At issue in the Cornhill case was whether a Bermuda fund could process a redemption request by a Libyan investor (the Libyan Investment Authority) who was on the sanctions list. It is possible to apply in Bermuda for a specific license, but the investor insisted that this was not necessary and would merely lead to delay. The investor claimed that redemption was permitted by a specific exemption in the sanctions legislation expressly allowing payments of funds to a frozen account.
Sanctions legislation is often complex in terms of both its drafting and its inter-relationship with other legislation. Much of the legislation stems from UN Securities Council Resolutions (the "UN Resolutions"). (This is not always the case, of course; the legislation in relation to Libya derives from the UN, but recent sanctions legislation in relation to Russia does not.) In the offshore world, the legislation is generally in the form of Orders in Council. Typically the UN Securities Council will issue a UN Resolution, which is translated into EU Regulations which apply directly to companies in the EU. The UN Resolutions are, after a few further months' time, also translated into Orders in Council, which are issued by the UK's Privy Council, and apply directly (or indirectly) to offshore companies. While often drafted with the EU Regulations in mind, the Orders in Council can be materially different from the EU Regulations, requiring a further level of comparison and analysis.
In the Cornhill case, the investor had obtained letters from both the UK Government and the Bermuda Governor stating that they agreed with their analysis. Lurking in the commercial background was a potentially large claim for damages by the investor against the fund for a failure to redeem. Accordingly, there was a large amount of pressure upon the fund to process the redemption but, if it acted in breach of sanctions, the danger was that it would have committed a criminal offence. Faced with this quandary, the fund sought a declaration from the Court. After a contested hearing, the Bermuda Court ultimately ruled that a license was required thus supporting the position taken by the fund.
The Cornhill case ultimately turned on the interpretation of an exemption provision in the Order in Council, which differed slightly from related exemptions in the EU Regulations, concerning the treatment of frozen funds. (The related exemption in the EU Regulations had been the subject of an English case, Maud v Libyan Investment Authority  EWHC 1625, the only English authority in this area.)
In passing, the Bermuda Court ruled on the relevance of advisory letters from the Bermuda Governor and the UK Government (concluding they were irrelevant) and on whether share redemption was a one-stage process or a two-stage process. This last point, the redemption issue, was academic given the Court's other rulings, but is interesting nonetheless for underlining the complexities in this area. The relevant exemption in the legislation related to payments, not conversion of assets. Redemption of shares involves the conversion of an asset (a share) into a debt, which is then paid. However, the Court held that since payment and redemption were treated contractually, under the fund's byelaws, as a single continuous process, redemption of shares equated to a payment of funds for the purposes of the legislation. An exemption concerning payment of funds could thus, in theory, cover conversion of an asset. This conclusion, which is obiter, is open to question but shows the difficulties in this area.
Sanctions legislation is an increasingly favoured policy tool in foreign relations between states. The size and importance of this area of law can only grow. At the same time, the way in which Orders in Council are created, with subtle but material differences from EU Regulations, can make the area particularly complex. The Cornhill case shows the difficulties of interpreting Orders in Council relating to sanctions. It also shows the ability and willingness of the Courts to provide guidance in the form of declaratory relief.1
Ben Adamson is a director in Conyers' litigation department specialising in commercial dispute resolution. He represented the fund.
- The period from issuance of the Originating Summons to the delivery of the ruling was seven months.