Cayman Island court refuses worldwide freeze on Essar Global Fund

New Delhi: In a setback to ArcelorMittal, the Grand Court of Cayman Island has declined its plea for a 'Garnishee Order' and a 'Freezing Injunction' against Essar Global Fund Ltd, the parent firm of Essar Group of companies, for recovering a USD 1.5 billion arbitration award.

ArcelorMittal has mounted legal battles against the Ruia family in multiple countries in an effort to enforce a USD 1.5 billion US arbitration award it had won in December 2017 on an Essar Steel Minnesota's terminated iron-ore pellets supply contract to ArcelorMittal USA LLC (AMUSA).

But Essar Steel Ltd, which had assumed the liabilities of the US contract, has said it could not pay. It now has less than USD 2.5 million in assets.

To seek enforcement of the award, ArcelorMittal moved courts in Britain, Mauritius, and the Cayman Island seeking a 'Garnishee Order Absolute' and a 'Freezing Injunction and Asset Disclosure Award' against Essar Global Fund Ltd (EGFL).

Justice Ian RC Kawaley in a 30-page order issued on July 2 declined the Garnishee Summons and the modified Freezing Order with the liberty to apply, according to the order copy reviewed by PTI.

ArcelorMittal did not reply to an email sent for comment.

A garnishee order is a common form of enforcing a judgment debt against a creditor to recover money. Put simply, the court directs a third-party that owes money to the judgement debtor to instead pay the judgement creditor. The third-party is called a garnishee.

A Garnishee Order Absolute prevents the garnishee from making repayment of the debt owed to the judgement debtor.

The Cayman Island Court ruled that AMUSA's case is far from straightforward and the existence of the alleged debt on the basis of which it had approached the Court is "sufficiently controversial".

At the heart of the legal dispute is an arbitration award from an ICC Arbitration Tribunal sitting in Minnesota that AMUSA obtained against Essar Steel Ltd, a subsidiary of EGFL, in December 2017. AMUSA has no direct claims against EGFL. But it claims that ESL has certain receivables from EGFL.

ESL itself is under administration in Mauritius.

The arbitral award was granted ex-parte after ESL had withdrawn from the arbitration procedure on the basis of legal advice it had received.

A week before the court hearing in the Cayman Islands, AMUSA dropped its plea of seeking a substantive Garnishee order and instead sought a contested hearing on the question of whether or not it was entitled to relief.

It also amended its plea of seeking a Freezing Injunction and amended the relief sought to a far less intrusive form of an injunction.

However, the Court declined to give the reliefs sought by AMUSA. Its applications for directions for the hearing of its Garnishee Summons and for a modified Freezing order were adjourned.

The Court reached this conclusion after VTB, a Russian Bank which has lent credit to EGFL joined the proceedings and told the court that any attempts by AMUSA to execute a garnishee order against EGFL were debarred by a Subordination Deed entered into in October 2016 between EGFL, ESL, and VTB.

According to VTB, the bank has a security interest over substantially all of the assets of the Essar Group.

EGFL argued before the court in the Cayman Islands that the English Court was wrong to draw adverse inferences and AMUSA's legal actions were driven by a fierce commercial rivalry.

VTB on its part argued the existence of the debt relied upon by AMUSA was doubtful. It said the operations of EGFL's subsidiaries would be adversely affected by a worldwide freezing order against it.

The Cayman Court in its order observed that "AMUSA is seeking to attach by way of execution a subordinated debt allegedly owed by EGFL to ESL."

"I accordingly find that assuming for present purposes the Subordination Deed to be valid, its legal effect is that (1) ESL cannot sue to recover any inter-company debt owed to it by EGFL, (2) AMUSA cannot stand in a better position than ESL, and (3) as a result a Garnishee Order is not legally available," the order said.

The judge also refused a worldwide freezing order on ESL, on the basis that ESL is already in administration and therefore the risk of dissipation of assets in the given circumstances seemed low and therefore a freezing order is simply disproportionate and unnecessary.

"It is essentially common ground that the existence of the debt (that AMUSA claims EGFL owes to ESL) is sufficiently controversial to make it impossible for AMUSA to seek more than directions on its Garnishee Summons," it said. "It seems clear that AMUSA's case is far from straight forward".