Recent Developments in Insolvency Law and the Impact on Fraud Actions C5 European Fraud, Asset Tracing and Recovery Forum Grand Hotel Kempinski, Geneva, Switzerland April 14-15, 2011 Sofie Hoffman Bernd H. Klose, CFE Boodle Hatfield Kanzlei Bernd H. Klose 89 New Bond Street Wilhelmstrasse 14a London W1S 1DA, United Kingdom 61381 Friedrichsdorf, Germany Email: shoffman@boodlehatfield Email: bernd.klose@raklose.de www.boodlehatfield.com www.raklose.de
Introduction Case study Antecedent transactions Voidable preferences Settlement Agreement? challenges for the liquidator UNCITRAL Model Law/Cross-Border Insolvency Regulations 2006 (CBIR) Recent cross-border decisions
Case Study (1) Jonas (J) and Artem (A) play golf together every weekend Sometimes they are joined by William (W) and his son Zac (Z) (who used to be a partner at a prestigious accountancy firm) A has his own company, Groovy Golf Balls (GGB), which has operations in Germany and Russia The latest venture for GGB is the sale of golf ball vending machines A manufacturer has been found in China. Some initial financing has been secured from the bank, but A is also keen to find private investment
Case Study (2) A year ago, J agreed to invest an initial 200,000 into GGB on terms that provide for repayment of interest at 15% pa J s initial investment was repaid and he has since made further monthly investments In the last few months, there have been delays with the repayments
Case Study (3) J visited GGB s offices last week An employee informed J that GGB has never sold golf ball vending machines and that the business had been struggling The employee informed J that A had not been into the office for several months J went to A s house and A s wife gave him a package of documents delivered that morning, including a worldwide freezing order obtained by W against A, GGB and several other individuals
Case Study (4) It is clear from these documents that W has also made significant investment in GGB J later learns that Z has been working for GGB for the last 18 months J hears gossip that A has subsequently settled W s claims J applies for a freezing order and subsequently obtains an order for disclosure of the settlement agreement
Case Study (5) The settlement agreement reveals that A/GGB agreed to transfer 10m to W in settlement of his claims Meanwhile, A files an affidavit of assets in response to J s freezing order The affidavit shows that apart from a holiday home worth 150k, A has no other assets A fails to file a defence to J s application Judgment in default against A for 5m
Case Study (6) A few months later a liquidator is appointed over GGB and a trustee in bankruptcy over A s assets They are contacted by German and Russian appointed liquidators, who are considering what assistance they may be able to obtain from the English Courts
The Race for Assets The creditor who is active to obtain payment of his debt ought in principle to retain the fruits of his diligence. He ought not be made to refund them for the benefit of others who were less diligent (The Cook Report 1982, para 1256(b) A person who had the misfortune to have given credit to a company which runs into financial difficulties had every right to seek to secure himself. And such company or its other creditors have every right to hasten liquidation in order to thwart such a purpose (Lord Brightman Roberts Petroleum Ltd v Kenny Ltd (HL(E))
Race for Assets (UNCITRAL Legislative Guide on Insolvency Law 2005) It is a generally accepted principle of insolvency law that collective action is more efficient in maximising the assets available to creditors than a system that leaves creditors free to pursue their individual remedies and that it requires all like creditors to receive the same treatment. Provisions dealing with avoidance provisions are designed to support these collective goals Avoidance provisions may also have a deterrent effect, discouraging creditors from pursuing individual remedies in the period leading up to insolvency if they know that these may be reversed or their effects nullified on commencement
Insolvency Act 1986 S238/S339 avoidance of transactions at an undervalue S239/S340 avoidance of preferences S245 avoidance of late executed floating charges S423 avoidance of transactions defrauding creditors
Insolvency Statue 1999 S129 - Transactions made prior to the opening of insolvency proceedings and disadvantaging the creditors of the insolvency proceedings may be contested by the insolvency administrator under sections 130 to 146 S130/131 congruent/incongruent coverage (3 months) S132 transactions constituting a direct disadvantage to creditors (3 months) S133 wilful disadvantage (10 years) S134 gratuitous benefit (4 years)
S239 Preferences Liquidator or administrator may apply to court for an order where company has, at a relevant time given a preference to any person Company gives a preference to a person if: (1)that person is one of the company s creditors (2)the company does anything or suffers anything to be done which (in either case) has the effect of putting that person in a position, which in the event of the company going into insolvent liquidation will be better than the position he would have been in had the thing not been done (s239 (4))
S239 Preferences Time Limits Time is not relevant time unless the company is: (1)unable to pay its debts as they fall due or (2)becomes unable to pay its debts in consequence of the preference 6 months ending with the onset of insolvency or 2 years/connected person] The fact that something has been done pursuant to a court order does not prevent this from constituting a preference
S241 Orders Liquidator may in theory apply to set aside a wide variety of transactions Variety of court orders available including against third parties as well as against the person whom the company dealt with in transaction under challenge Bona fide third parties acquiring property or benefits for value will be protected (Re Sonatacus Ltd [2007] BPIR 106)
Hurdles for the Liquidator? The Desire to Prefer The company must be influenced in entering into an impugned transaction by a subjective desire to put the creditor into a better position (S239(5)) Intention is objective, desire is subjective. A man can choose the lesser of two evils without desiring either.a man is not to be taken as desiring all the necessary consequences of his actions.it will still be possible to provide assistance to a company in financial difficulties provided that the company is actuated only by proper commercial considerations. Under the new regime a transaction will not be set aside as a voidable preference unless the company positively wished to improve the creditor s position in the event of it s own insolvent liquidation (L J Millett Re MC Bacon Ltd [1990] BCLC 324)
Hurdles for the liquidator? Evidence of a desire to prefer may be circumstantial There is of course no need for there to be direct evidence of the requisite desire. Its existence may be inferred from the circumstances of the case. But the mere presence of the desire will not be sufficient by itself, it must have influenced the decision to enter into the transaction (LJ Millet Re MC Bacon)
Re Sonatucus Ltd With his previous knowledge that the 65,000 had been paid into the company s bank account and that Mr Susca s companies had been in some financial difficulty, he must have know that it was likely that the 50,000 had been repaid by the company and, moreover, at time when it was insolvent, or he must at the least have shut his eyes to that possibility. On either footing Mr Aslam has failed to establish that CIL acted in good faith
Collecting Evidence Exhaust sources of evidence that could shed further light on the relationship between Artem and William Wide powers of the court to inquire into the company s dealings (S236 (2) IA 1986) General rule office holder may not apply for examination if he has made firm decision to commence proceedings against the respondent
Pressure Exerted by William As a result of MC Bacon it is thought that it will be a defence to a preference claim to show the creditor exerted pressure Distinction between directors who bow to commercial pressure in order to act in the commercial interests of the company and where there is no commercial benefit to company but there is a benefit to the directors Then the mere fact that the creditor exerted pressure on them should be irrelevant (unless the pressure was so strong as to override the directors will in giving the preference, for example if the preference was given at gun point
Suggestions for Reform Introduction of an effects based test? USA, Australia, New Zealand and Scotland Time limits Evidential burden connected parties to also prove that company was not insolvent at time when alleged preference given reversal of burden of proof so that applies to all parties Recoveries Preference recoveries are to be applied to meet the claims of creditors in general. The IA 1986 does not contain any provisions on this issue
UNCITRAL Model Law on Cross Border Insolvency The Model Law provides a suggested framework of registration that sets out when a country s national courts must recognise insolvency proceedings that have been commenced in a different country The CBIR 2006 give effect to the insolvency Model Law in Great Britain (1) Recognition of representatives of foreign proceedings and access to local courts (2) Relief to assist foreign proceedings (3) Provisions for facilitating co-operation among courts of jurisdictions in which debtor s assets are located
CBIR 2006 CBIR do nothing to limit the pre-existing powers of the court (Art 7 of Sch 1) Statutory cross-border provisions continue to apply, subject to their eligibility criteria Mandatory provisions of EC Insolvency Regulation override provisions of CBIR, where in conflict Existing private international rules on cross-border insolvency continue to co-exist with CBIR and will apply where they have no application e.g. where relevant foreign proceeding is not a collective proceeding or cannot be characterised as an insolvency proceeding
CBIR 2006 Who can be Recognised? Foreign representatives of foreign main and foreign non-main proceedings Main proceeding defined as a foreign proceeding where a corporate debtor has its centre of main interests (COMI) Non-main proceeding foreign proceeding rather than a foreign main proceeding, taking place where the debtor has an establishment
CBIR 2006 Foreign Proceeding (Art 2, Sch 1) A collective judicial or administrative proceeding in a foreign state, including an interim proceeding, pursuant to a law relating to insolvency, in which proceeding the assets and affairs if the debtor are subject to the control or supervision by a foreign court, for the purpose of reorganisation or liquidation
CBIR 2006 Article 21 of Sch 1 (1) Upon recognition of a foreign proceeding, whether main or non-main, where necessary to protect the assets of the debtor or the interests of the creditors, the court may, at the request of the foreign representative, grant any appropriate relief including.. (d) providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor s assets, affairs, rights, obligations or liabilities.
Picard (Foreign Representative of Bernard L Madoff Investment Securities LLC) v FIM Advisors LLP Application by the trustee for the liquidation of the business of Bernard L Madoff Securities LLC ( BLMIS ) for an order under Article 21 of Schedule 1 to the CBIR 2006 requiring FIM Advisors to produce documents concerning assets, affairs, rights, obligations and liabilities of BLMIS.
Facts FIM Advisors is a company based in London FIM incorporated Kingate Funds (KF), which were managed by Kingate Management Shares in KF were sold to investors and were invested with BLMIS A total of $1.6 billion was transferred by Kingate to BLMIS
Questions for the Court (1) Does the information concern the debtor s, affairs, rights, obligations or liabilities? (2) If yes, the court has discretion to order the delivery of the information In exercising this discretion, the court must have regard to all the relevant circumstances and ensure that the interests of the person against whom the order is sought are adequately protected
Jurisdiction Both parties agreed that the court should have regard to the principles upon which the court would exercise its powers under s236 and s366 of the Insolvency Act 1986 Relevant principles include: (1) The power should be conferred to enable the office holder to discover the true facts concerning the affairs of the company; (2) Even an honest person who finds himself to have been involved in a fraud must be expected to cooperate with the office holder; (3) The court must avoid making an order which is unnecessary, unreasonable or oppressive to the Respondent; (4) Considerable weight should be given to the views of the office holder
Decision The court considered that Kingate must or should have known that the business of BLMIS was inherently fraudulent Payments made to the Kingate funds investors, as well as to management and consulting fees paid to Kingate Management and indirectly to FIM Ltd and FIM Advisors, were likely to have been preferential payments or fraudulent transfers received from BLMIS The court granted the trustee s request for disclosure of all documents from 1 January 1993 to 31 January 2009 showing the organisation of FIM Advisors, the Kingate Funds and Kingate Management
Rubin and another v Eurofinance SA and others Eurofinance SA, a BVI company, created The Consumer Trust ( TCT ) in March 2002 The law of England and Wales governed TCT. The defendant trustees were solicitors in England and the beneficiaries of the trust were resident in US and Canada TCT carried out a voucher scheme which offered consumers the opportunity to receive back up to 100% of the value of purchases made in selected retailers. Proceedings brought in Missouri against TCT under consumer protection legislation resulted in settlement Receivers appointed and Chapter 11 plan approved in New Year Proceedings brought in US Bankruptcy Court against the respondents (Adversary proceedings)
Issues on Appeal (1)Whether foreign bankruptcy proceedings in respect of a company (Chapter 11 proceedings) including Adversary proceedings should be recognised as foreign main proceedings (2)Whether the judgment of the US Bankruptcy Court should be enforced as a judgment of the English Court
Court of Appeal s Decision (1) Ordinary rules for not enforcing foreign judgments in personam did not apply to bankruptcy proceedings (2) Bankruptcy proceedings included the mechanisms under S5 238, 239 1A 1986 and equivalent US provisions (3) private international bankruptcy law, whether personal or corporate, should be unitary and universal recognition carries with it the active assistance of the court which should include assistance by doing whatever this court could have done in the case of domestic insolvency. (Ward LJ)
Re Stanford International Bank Ltd Stanford International Bank ( SIB s ) registered office was in Antigua SIB was allegedly involved in a fraudulent Ponzi Scheme which collapsed at the beginning of 2009 SEC obtained order for the appointment of a US receiver Liquidator was appointed in Antigua
Facts Both the liquidators in Antigua and the receivers in the US applied for recognition as the COMI under the Cross-border Insolvency Regulations 2006 ( the Regulations ) The Regulations give effect to the United Nations on International Trade Law Model Law on Cross-Border Insolvency (UNCITRAL) foreign main proceedings means foreign proceedings taking place in the State where the debtor has the centre of its main interests There is a rebuttable presumption that the debtor s registered office is the COMI
Court of Appeal s Decision (1) The Court looked to the origin and objectives of UNCITRAL; to provide for reciprocity between all the states that might incorporate UNCITRAL into domestic law To fall within the scope of foreign law, a foreign proceeding had to possess certain attributes including: (1) The basis of insolvency-related law of the originating state (2) involvement of the creditors collectively (3) control or supervision of the assets and affairs of the debtor by a court or another official body (4) Reorganisation or liquidation of the debtor as part of the purpose of the proceeding
Court of Appeal s Decision (2) The Antiguan litigation was collective, judicial and pursuant to a law relating to insolvency The purpose of the order was to prevent dissipation and waste, not to liquidate or reorganise the debtor s estates The powers conferred on and the duties imposed on the receiver were duties to gather and preserve assets, not to liquidate or distribute them The Court of Appeal upheld the decision that the proceedings in Antigua were the main foreign proceedings The US receivership was not collective in the relevant sense because it was for the protection of investors, not for the wider class of creditors generally