ASSET RECOVERY IN THE OFFSHORE WORLD – PRIVATE BUT NOT SECRET

Overall, cases involving asset recovery require a coordinated approach both onshore and offshore, factoring in the location of assets and how to identify them, the need for immediate asset preservation orders, and, particularly with an offshore structure, what steps might need to be taken further down the corporate group to take control and realize the ultimate operating assets and/or value

While it can be said that the offshore world is generally more private than some other jurisdictions, it is also true that there is information which can be obtained in relation to offshore entities in the Cayman Islands, the British Virgin Islands ("BVI"), and Bermuda, and steps which can be taken to protect and recover assets held in offshore structures in appropriate circumstances.

As a starting point, the key areas which are usually helpful are publicly available information, both offshore but also elsewhere (which has become public by other means), information available to shareholders and creditors, information which can be sought from the relevant Court, and, once assets are identified offshore, what steps can be taken.

We discuss the rights of shareholders below, in addition to rights of creditors, given that in some circumstances it is possible to obtain the recognition of a foreign bankruptcy or liquidation proceeding of a shareholder of an offshore company, so that that foreign representative "steps into the shoes" of the shareholder qua shareholder, and has these rights. The discussion below is limited to unsecured claims by creditors, and does not include additional information that might be available to regulators and/or other governmental agencies, including under tax information sharing arrangements and beneficial ownership regimes.

Publicly Available Information

The information which is publicly available differs, and will include, for example, basic company information including the company number, current status and registered address (in each of the Cayman Islands, the BVI and Bermuda), but with some jurisdiction specific differences. For example, it is also possible to get the memorandum and articles of association ("M&A") of a BVI company, and the register of directors in each of Cayman and Bermuda. In Bermuda, which provides the greatest transparency, it is also possible to get the register of members, which can be very helpful from an asset recovery perspective.

In addition, when looking for company ownership information, it is also possible to look at, for example, relevant stock exchange filings of entities within a corporate group, which may contain disclosures of shareholders, as well as publicly available Court filings, which may also contain information as to offshore assets. There may also be publicly available Court hearings, at which relevant information may be obtained, noting that each of these jurisdictions starts from the common law principle of open justice.

Information Available to Shareholders and Creditors

Shareholders and creditors may be able to access additional information beyond that which is publicly available, either under the relevant statutory provisions, or contractually through information rights clauses in shareholder agreements or loan or other documentation. For example, in the BVI a shareholder is entitled to inspect the registers of members and directors, along with certain minutes of meetings or written resolutions (subject to director approval or a Court order), and in all three, the members are entitled to the M&A (Bye-laws in Bermuda).

For creditors, the position is different, with creditors having the right to inspect the register of mortgages in the Cayman Islands. In Bermuda, the register of charges is public and in the BVI, there is a public register of charges, but it is not mandatory to register security interests.

Information from the Court

In all three jurisdictions, it is possible to conduct a Court search which will include civil proceedings (including winding up proceedings), and a company search will also show the status of a company (for example, in liquidation). For companies in liquidation, the information available to creditors is broader again, with creditors usually having access to certain liquidation files and Court files in all three jurisdictions.

While there is no process for pre-action disclosure or discovery in these jurisdictions, it may be possible to obtain information by other means, and in particular, the use of Norwich Pharmacal orders (including as against registered offices, which can be extremely helpful), freezing orders with disclosure orders, Banker's Trust orders, and/or Anton Piller relief. It may also be possible to obtain relief in aid of foreign proceedings. Liquidators and bankruptcy trustees also have statutory broad information gathering powers. All three jurisdictions are party to the 1970 Convention on Taking Evidence Abroad in Civil Cases which might be of assistance, depending on the factual circumstances.

Recovery of Assets

How best to proceed overall with an asset recovery strategy will depend on the circumstances, including, but not limited to (a) the location of assets; (b) other claims on assets; (c) the structure of the group and the director and shareholder powers which are available; (d) whether there is a strategic benefit to a charging order, which has effect as a security (this is not applicable in Bermuda); (e) whether the speed of a collective liquidation proceeding may be preferred, along with the benefit of a liquidator taking control of the company, and with the power to unwind pre-liquidation transactions; and (f) the impact of any arbitration clauses.

Other than a domestic civil claim and enforcement proceedings, or a domestic liquidation proceeding in the offshore world as against the offshore debtor, there are at least two other ways in which creditors can seek to recover assets offshore, as follows:

1.A foreign judgment or arbitration award elsewhere, which might then be recognized offshore and given effect as a local judgment, coupled with a charging order (only in the BVI or the Cayman Islands, not Bermuda) and/or the appointment of receivers. In this regard, a charging order might itself be coupled with an order for sale and credit bid by a creditor (to then own the subsidiary shares) and/or a receiver appointment might include voting rights with respect to shares of subsidiaries for the purpose of taking control of a structure using shareholder voting rights to change subsidiary Boards of Directors. That new Board of Directors can then realize assets for distribution to stakeholders.

2. The recognition of a foreign liquidator or bankruptcy trustee to the company or person holding assets offshore, which may then enable the offshore Court to assist the foreign appointee to gather and take control of offshore assets. While none of the jurisdictions has implemented the Model Law on Cross-Border Insolvency, each of them invokes common law powers for these purposes, to varying degrees.

Interim orders are also available including freezing orders and the appointment of provisional liquidators where there is a risk of dissipation of assets. In any case, the asset protection steps which are needed (if any) should be considered at an early stage.

Overall, cases involving asset recovery require a coordinated approach both onshore and offshore, factoring in the location of assets and how to identify them, the need for immediate asset preservation orders, and, particularly with an offshore structure, what steps might need to be taken further down the corporate group to take control and realize the ultimate operating assets and/or value. While it is true that the offshore world may be more private than other jurisdictions, there are steps that can be taken offshore to identify, collect, and realize assets for the benefit of stakeholders.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.