Perspective: How to Strategize a Cross-Border Asset Recovery Investigation

Editor’s Note: The authors of this post are partners, respectively located in Hong Kong and the Cayman Islands, at a law firm that focuses on investigations and litigation.

By Randall Arthur and Rebecca Hume, Partners at Kobre & Kim

Large scale insolvencies by their very nature often involve cross-border issues. Liquidators, and other appointment takers, usually find themselves involved in large global asset tracing and recovery exercises. A successful outcome can depend on the approach taken by the legal team at an early stage of the issue. Following their appointment, liquidators need to ensure that they turn their attention to the steps that they will need to undertake in order to identify, secure and realize the assets of the company to maximize the return to creditors.

While most asset tracing and recovery exercises within a liquidation are complex, time consuming and costly, there are a number key issues and questions that liquidators will need to address to give themselves every chance of successfully recovering assets for creditors. In the first of a two part series, we will look at considerations for liquidators when they are appointed to conduct cross-border recovery investigation.

Asset Concealment

While many of the company’s assets exist in the jurisdiction of the liquidators’ appointment, equally it is very common for assets to be located outside of the jurisdiction. There may be a multitude of reasons necessitating a liquidator to conduct a global asset tracing and recovery exercise; for example a multi-jurisdictional corporate structure or the business of the company involving cross-border transactions and trading. Even in the absence of these, it is often the case that those behind or involved with the company, such as the directors, shareholders and employees, have taken deliberate or fraudulent steps to hold (if not conceal) assets in various overseas vehicles and structures. Such vehicles include: foundations; other companies, including LLCs and, as commonly found offshore, exempt companies; trusts, for example asset protection trusts, purpose trusts and fully discretionary trusts; third party nominees; charitable foundations; family members etc. Liquidators need to be aware of the various types of structures in which assets are held and focus their investigations accordingly.

Protecting the Investigative Trail

Before any investigation and recovery exercise can take place, it is important for the liquidators to take immediate steps to protect and preserve the investigative trail and commence onshore investigations in the jurisdiction of appointment and/or the place in which the company has its principal place of business. Liquidators come to their appointment “blind,” on most occasions having little or no background knowledge of the company or the group over which they have been appointed. It is for this reason that in many jurisdictions liquidators are given wide statutory investigative powers.

Common sources of information which allow liquidators to obtain the background information they need and provide them with a route map to commencing a multi-jurisdictional asset investigation and recovery exercise include:

• Books and records of the company, including electronic information;

• Key individuals within the company/group – shareholders; officers and directors; senior management; other employees;

• Third parties such as banks, company secretaries/registered agents, accountants, lawyers and other agents of the company;

• Publicly available information – searches of various registries, annual reports, industry publications, shipping records, worldwide media etc.

In addition, liquidators will often find it necessary to take advantage of powers given to them to compel non-cooperative parties to provide information and documents to them with the assistance of the court.

For example, in Hong Kong obtaining an order from the court under section 221 of the Companies (Winding up and Miscellaneous Provisions) Ordinance that certain parties be examined under oath or provide documents to the liquidator relating to the company’s affairs.

Identifying Relevant Jurisdictions

After securing the investigative trail and locating all related assets, the liquidators will be in a position to identify potential jurisdictions in which they should be conducting asset investigations and recoveries. While such an exercise can take them anywhere in the world, liquidators, especially those appointed in Hong Kong and other Asian jurisdictions, often find themselves conducting investigations and recovering assets in jurisdictions such as the United States, United Kingdom, and Europe, the Caribbean (e.g. the BVI and Cayman Islands) and other offshore jurisdictions where assets are commonly held/hidden. Each of these jurisdictions can provide their own challenges.

Varying Legal Regimes

One of the most important issues a liquidator encounters when working on a cross-border liquidation is the interaction between, and the differing laws and procedures in, the various jurisdictions that the liquidators find themselves in. While the UNCITRAL Model Law on Cross Border Insolvency (“Model Law”) was prepared with the intention of facilitating co-operation and assistance of foreign insolvency proceedings, in reality only 23 states around the world have adopted the Model Law. In jurisdictions which have adopted the Model Law, liquidators usually have little problem in obtaining recognition and obtaining wide powers allowing them to conduct investigations and realize assets.

However, where the Model Law is not available, liquidators often find themselves dealing with uncertainty as to whether they will be able to obtain recognition in certain jurisdictions and, if so, what powers the foreign court will cloth them with to enable them to recover assets for the insolvent estate.

Hong Kong, for example, has not adopted the Model Law and has no legislation allowing for cross-border assistance. Foreign insolvency appointment takers coming to Hong Kong seeking the assistance of its courts must therefore rely on common principles of comity. While it is common to apply for ancillary winding-up orders in Hong Kong in order to, for example, conduct investigations and realize assets, there has been a recent trend of taking the more expedient and less costly route of seeking recognition of the foreign insolvency proceedings and obtaining additional orders though applications made to the Hong Kong court on the back of letters of request.

Even so, this process has highlighted some shortcomings in Hong Kong’s insolvency laws. InThe Joint Official Liquidators of A Company v B and Another[2014] 4 HKLRD 374 the court granted recognition to a Cayman Islands liquidator and made orders allowing the liquidator to obtain documents from a third party pursuant to a letter of request issued by the Cayman Court. In coming to his decision Mr Justice Harris held that “the Companies Court may pursuant to a letter of request from a common law jurisdiction with a similar substantive insolvency law make an order of a type which is available to a provisional liquidator or liquidator under Hong Kong’s insolvency regime.”

On the flip side, inThe Joint Administrators of African Minerals Limited (in administration) v Madison Pacific Trust Limited[2015] HKEC 608, the court refused to grant recognition to a UK administrator seeking to enforce upon a Hong Kong secured creditor a moratorium imposed by the UK administration. Mr Justice Harris noted that Hong Kong has no equivalent to a UK administration and thus no provisions for a moratorium on the enforcement of a secure debt. Accordingly, granting orders that would not otherwise be available in Hong Kong would be an “impermissible extension of the common law principle that requires the court to recognise foreign liquidators and assist them.”

These decisions illustrate the importance of strategic investigations, to identify the jurisdictions assets are located in, and understand the likely impact of the local laws of those jurisdictions and the ability of the local courts to grant recognition and assistance to cross-border insolvency proceedings. Recognition applications can be time consuming and expensive and a failure to obtain assistance from a foreign court can severely hinder the liquidators’ attempts to conduct investigations and recover assets as well as reduce the pool of funds available for distribution to creditors.

Investigative and Recovery Tools

Despite its importance, obtaining recognition is not the be all and end all of any cross-border asset recovery exercise. There are often other tools available to liquidators through which they can investigate, preserve and realise assets. Liquidators of holding companies in a large group will usually find it necessary to take control of subsidiaries in multiple countries, which can often be done simply replacing the directors and other officers of the subsidiaries.

Of course, even this can sometimes be challenging. For example, difficulties are often faced by liquidators taking control of subsidiaries in the PRC due to missing chops and/or uncooperative legal representatives. However, even here there has been some hope in light of the June 2014 Supreme People’s Court ruling inSino-environment Technology Group Limited v Thumb Env-Tech Group (Fujian) CoLtd, in which it was confirmed, among other things, that the sole shareholder of a wholly foreign owned enterprise has the power to remove and replace the legal representative of the enterprise.

Liquidators can also take advantage of civil remedies where they have commenced or are contemplating commencing legal proceedings, such as obtaining pre-action discovery throughNorwich Pharmacalorders in common law jurisdictions or 28 USC § 1782 orders in the U.S. Mareva injunctions (known as freezing orders in the UK or restraint orders in the US) can be also be a useful tool in preserving assets pending the determination of legal proceedings.

As in their home jurisdiction, liquidators will also need to ascertain what potential causes of action may be available to them in foreign jurisdictions, such as unfair preference/clawback claims, fraudulent transactions, transactions at an undervalue and claims against directors and officers and ensure that there are aware of any statutory limitation periods which impact the ability to bring such claims.

Cross-border asset tracing and recovery within an insolvency administration is complex area, and one which we have only been able to scratch the surface of here. An important takeaway, however, is that it is important for liquidators and their legal team to map out a strategy at an early stage to ensure that assets which may be available to the liquidators are identified and secured early on so that they can be realised for the benefit of creditors. Delays in undertaking such an exercise are likely to give unscrupulous shareholders and directors further opportunity to conceal assets in various jurisdictions, leaving liquidators chasing their tails.