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ISSUE 3 - AMERICAS & ASIA FOCUS W: knect365.com/asset-recovery-hub/
Asset Recovery Hub E-Magazine: Issue 3 - Americas & Asia Focus
ASSET RECOVERY
INTRODUCTION
We are very pleased with continuing support of the Asset Recovery Magazine from our
HUB
Danushka De Alwis
readers and especially our contributors and delighted to bring you our 3rd edition. Head of Asset Recovery Series
We welcomed over 400 practitioners from around the world to Singapore, Sao Paulo and Paul Barford
our London drinks and you can see the highlights in this issue with a special focus on the Divisional Manager Legal
Americas and Asia plus indispensable coverage of hot issues from elsewhere in the Asset
Recovery world. Chris Leese
Commercial Director
The enthusiasm and level of expertise on display continues to demonstrate what an
important and fast-moving area we are all involved in.
The Asset Recovery Hub Team CONTRIBUTORS
Leyza F. Blanco
Andrew B. Dawson
CONTENTS Greg S. Grossman
Sequor Law
Henrique Forssell
ISSUE 3 - AMERICAS & ASIA FOCUS Octaviano Duarte Filho
Felipe Vieira
Florida leads the way in development of chapter 15 jurisprudence............................................. 3 Duarte Forssell Advogados
The Economic Freedom Provisional Measure and other tools against fraud in Brazil ��������� 7 Philip Hime
Brazilian high court decision disregards Creditors’ guarantees..................................................11 S-RM
The rise of cybercrime in Asia Pacific and considerations for organisations operating in David Harby
the region....................................................................................................................................................14 Lydia Redman
HFW
Enforcement of foreign judgments in Dubai.....................................................................................16
Bahamas Asset Recovery – Privy Council determines Extraterritorial reach of Mary Young
clawback claims .....................................................................................................................................18 Kingsley Napley
Taking a leaf out of the US book on Corporate Crime: The UK’s plan to fight Economic Sophia Rolle-Kapousouzoglou
Crime must focus more on Civil Asset Recovery Tools................................................................20 Lennox Paton
The Hague Judgments Convention: Easier enforcement of foreign judgments Amy Harvey
in England?.................................................................................................................................................23 Amalia Neenan
The Astana International Finance Centre Court – An introduction to the Court and Kelly Thornton
enforcement of its judgments in Kazakhstan..................................................................................25 Peters & Peters
Tools for cross-border enforcement of judgments.........................................................................27 Harriet Campbell
A Second Wind for the French Blocking Statute..............................................................................30
Galina Usorova
Stephenson Harwood LLP
French Safeguard proceeding-A new « RALLYE » for Creditors?.................................................32
Sahana Jayakumar
Civil Recovery Orders: a crucial weapon in the fight against economic crime Five Paper
and corruption...........................................................................................................................................34
Jon Felce
Enforcement of foreign judgments in Jersey...................................................................................35
Rachel Turner
Full and frank disclosure: too heavy a burden?.................................................................................38 PCB Litigation LLP
Elena Fedorova
BONIFASSI Avocats
UPCOMING EVENTS IN THE ASSET RECOVERY SERIES Paul-Marie GAURY
Luca CAMPBELL
CABINET BOUTTIER Avocats
Stephen Alexander
26 - 28 February 2020 Mourant
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Asset Recovery Hub E-Magazine: Issue 3 - Americas & Asia Focus
FLORIDA LEADS THE WAY IN
DEVELOPMENT OF CHAPTER
15 JURISPRUDENCE
Leyza F. Blanco Andrew B. Dawson Greg S. Grossman
Sequor Law Sequor Law Sequor Law
WHILE CHAPTER 15 IS NOT A NEW TOOL—IT IS APPROACHING ITS
FOURTEENTH BIRTHDAY—IT IS, LIKE MANY A TEENAGER, UNDER-
APPRECIATED AND AT TIMES MISUNDERSTOOD. THIS IS IN PART BECAUSE
CHAPTER 15 IS NOT REALLY “BANKRUPTCY” IN THE SENSE THAT IT DOES
NOT CREATE A BANKRUPTCY ESTATE OR APPOINT A TRUSTEE.
Chapter 15 of the Bankruptcy Code Finally, because Chapter 15 requires that may be of particular interest in
has become a powerful asset recovery U.S. bankruptcy courts to interface with asset recovery efforts.
tool, and the Florida bankruptcy courts foreign insolvency proceedings, there
have been leading the way in this has been a great deal of uncertainty Chapter 15: A Bankruptcy
development. The Southern District of as to how open courts would be to without a Bankruptcy Estate
Florida has seen more Chapter 15 filings cooperating with foreign insolvency
than any court other than the Southern proceedings, particularly when those Chapter 15 of the U.S. Bankruptcy
District of New York, and many of these foreign proceedings involve insolvency Code provides a powerful tool kit for
Florida Chapter 15 cases have been laws that are importantly different bankruptcy trustees and liquidators, but
focused on assisting foreign trustees from U.S. bankruptcy law in substance it is not itself a “bankruptcy” case. It does
and liquidators track down and recover and process. One common concern not open a full bankruptcy proceeding
assets in the United States. Our team at when Chapter 15 was first enacted in or create an estate, as would happen
Sequor Law in Miami has alone filed over 2008 was that U.S. bankruptcy courts in a typical corporate bankruptcy case.
forty chapter 15 cases. might be reluctant to cooperate with Instead, Chapter 15 creates a process
foreign proceedings—or that they would to assist the representative of a foreign
While Chapter 15 is not a new tool—it is proceeding, whether that be a debtor-
cooperate inconsistently—in the face of
approaching its fourteenth birthday—it is, in-possession, trustee, monitor, or
foreign insolvency laws.
like many a teenager, under-appreciated other official. Chapter 15 permits that
and at times misunderstood. This is in Florida bankruptcy courts have in foreign representative to open a case
part because Chapter 15 is not really recent years played a key role in the in the bankruptcy court in order to seek
“bankruptcy” in the sense that it does not development of Chapter 15. It is perhaps assistance within the United States, with
create a bankruptcy estate or appoint a no surprise that courts here have been that assistance ranging from discovery
trustee. Instead, Chapter 15 provides a leaders in this arena, particularly as to orders to asset turnover orders.
procedure to assist trustees administer cross-border insolvencies originating
foreign insolvency cases whose cross- from Latin and South America. These The bankruptcy court’s threshold
border estates reach into the United courts have played important roles function is to determine whether to
States. The underappreciation also in establishing precedent for inter- recognize foreign proceeding, either a
stems in part because Chapter 15’s American cooperation and assistance foreign main proceeding (i.e., one filed
substantive contours remain unknown, in this still-developing area of law. where the debtor has its “center of main
as it is primarily a procedural vehicle This article will discuss three recent interests”) or foreign nonmain proceeding
with minimal substantive constraints. decisions that highlight developments (i.e., one filed where the debtor has an
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Asset Recovery Hub E-Magazine: Issue 3 - Americas & Asia Focus
establishment). The court then has recognize the Brazilian extension order Broad Discovery Relief: In re
discretion to fashion assistance. on public policy grounds; second, they
argued that the foreign representative
SAM Industrias, S.A.
Thus, there is no actual “debtor” in the
could not use Chapter 15 to order In re SAM Industrias, S.A., 2019 WL
Chapter 15 case and no estate is created.
discovery against the transferees 1012790 (Bankr. S.D. Fla. March 1,
Whereas a traditional bankruptcy case
because they were not “debtors”. 2019), built upon the foundation laid in
can be a cost-intensive and disruptive
Petroforte. In Petroforte, Judge Mark
endeavor—trustees are appointed, claims In what is now a widely-cited case (In re
also suggested an alternative basis
must be processed, assets liquidated Petroforte Brasileiro de Petroleo Ltda., 542
for ordering broad investigation into
and distributed, etc. —Chapter 15, in B.R. 899 (Bankr. S.D. Fla. 2015)), Judge
third party transactions in situations
contrast, is not a traditional bankruptcy Robert Mark rejected the first argument.
in which the third parties were actually
case. Rather, it is an ancillary case in aid He noted that U.S. courts grant a similar
involved in the fraudulent transfer or had
of the foreign bankruptcy proceeding. It type of relief under the equitable remedy
otherwise engaged in wrongdoing: “The
is thus more flexible and less onerous of substantive consolidation, and thus
Trustee’s Supplemental Response failed
than a traditional bankruptcy case. the Brazilian extension order was not
to establish any actual involvement in
substantively offensive as a matter of
The main questions in these ancillary the Plant Transaction or any wrongdoing
public policy. As to the ex parte nature of
cases concern what aid is available to the by any of the Third Party Targets.” The
the proceedings, he acknowledged that
trustees of the foreign insolvency cases. court, though, did not further discuss this
this differs from U.S. procedure, which
Chapter 15 provides some very specific alternative ground.
would have provided the remedy of
procedures designed to facilitate that
substantive consolidation only upon an The issue arose in SAM Industrias when
cross-border assistance, e.g., authorizing
open hearing; however, he noted that the the foreign representative of the Brazilian
judge-to-judge communications, and
parties had the opportunity to be heard at liquidation filed a Chapter 15 in the
it provides a non-exclusive list of relief
the appellate level in Brazil. Consequently, Southern District of Florida to investigate
the U.S. bankruptcy court can grant to
the Brazilian proceeding did not offend potential fraudulent transferees identified
the foreign representative. As with any
U.S. public policy. by the Brazilian courts. The Brazilian
relatively new legislation, there is a lot of
courts had found that the debtor had
uncertainty as to the extent of that relief
undisclosed interests in certain corporate
and to the standards for granting that
relief. The uncertainty in Chapter 15 has “JUDGE MARK HELD entities, which he had concealed by
transferring to family members. The
an additional complicating factor due
to its cross-border nature: would U.S.
THAT THE ENTITIES THAT foreign representative, accordingly,
bankruptcy courts extend relief to foreign WERE SUBJECT TO THE sought the Chapter 15 court’s assistance
in examining these family members, who
bankruptcy proceedings that differ from
U.S. bankruptcy law and procedures?
BRAZILIAN EXTENSION were not themselves debtors in Brazil,
Three Florida cases brought by Sequor
ORDER WERE and in examining certain non-debtor
corporate entities.
Law on behalf of foreign representatives, “DEBTORS” SUBJECT The debtor objected to this assistance,
illustrate these issues and show how the
Florida bankruptcy courts have helped
TO SECTION 1521’S arguing that the requested discovery
fashion answers and standards. DISCOVERY POWERS.” assistance falls outside the scope of
Chapter 15’s relief because the discovery
targets were not debtors in Brazil. As
Who is the Foreign “Debtor”: As to the scope of discovery assistance to the family members, the Chapter
In re Petroforte under Chapter 15, the court had to 15 court examined the Brazilian court
The first case is by now well known in interpret the scope of “debtor” under record carefully and concluded that
the cross-border insolvency world so section 1521(a)(4), which provides that a discovery was appropriate as to those
will receive only a cursory treatment; court may authorize the “the examination family members identified as transferees
however, it would be remiss to exclude of witnesses, the taking of evidence or of the debtor’s property. The foreign
the case altogether as it has had the delivery of information concerning representative, accordingly, was entitled
important ramifications throughout the the debtor’s assets, affairs, rights, to discover information related to the
Chapter 15 jurisprudence. obligations or liabilities.” transferees’ corporate and financial affairs.
Petroforte was one of Brazil’s largest Judge Mark held that the entities As to the non-debtor corporate entities,
gas and ethanol distributors before that were subject to the Brazilian the foreign representative was entitled
entering bankruptcy. That liquidation extension order were “debtors” subject to broad discovery not only as to those
had uncovered evidence of fraudulent to section 1521’s discovery powers. As entities in which the debtor had a
transfers made to several entities, to third parties who were not subject majority interest but also in those entities
which provided the basis for the to the Brazilian extension order, the found to have participated in the debtor’s
Brazilian court to enter ex parte an bankruptcy court in Petroforte held asset concealment scheme. Again, in
order extending the bankruptcy case to the trustee may be entitled to broad defining the scope of relief available to
include the transferees. The Brazilian discovery to the extent the debtor is a the foreign representative, the Chapter
trustees commenced a Chapter 15 majority stockholder in the non-debtor 15 court examined the findings of the
proceeding in the Southern District of discovery target. Such broad discovery Brazilian courts. The Brazilian courts
Florida to seek discovery to assist the “allows the Trustee to determine had found that the debtor had concealed
Brazilian liquidation. Some of these whether the stock, which is an asset assets through certain corporate pass-
discovery targets objected on two of the estate, has sufficient value to throughs owned and controlled by the
main grounds: first, the argued that induce the Trustee to take control of the debtor. The foreign representative was
the Chapter 15 court should refuse to entity, and attempt to derive value by thus entitled to discovery related to these
selling or liquidating the entity.” corporate pass-throughs. The foreign
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Asset Recovery Hub E-Magazine: Issue 3 - Americas & Asia Focus
representative, though, was not entitled enforcing or adjudicating tax claims from Section 1513(b)(2)(B) goes on to say “[a]
to discovery related to the non-debtor another sovereign.” Here, the debtors’ llowance and priority as to a foreign tax
entities whose connections to the debtor principal obligations were unpaid tax claim or other foreign public law shall be
had not yet been established in the debts owed in Canada. Republic of governed by any applicable tax treaty of
Brazilian courts. Accordingly, the court Honduras vs. Philip Morris Companies, the United States, under the conditions
concluded that the foreign representative Inc., 341 F.3d 1253, 1260 (11th Cir. 2003). and circumstances specified therein.”
is not entitled to “carte-blanche in his The issue, as urged by the debtors, was
The bankruptcy court ruled that the
inquiries of non-debtors,” but that he is whether a Chapter 15 court could order
Revenue Rule did not apply because it
entitled to obtain information narrowly to liquidate U.S. property for the purpose
was not being asked to “adjudicate or
tailored “to discover ‘the legal entities of satisfying Canadian tax claims.
rule upon the validity or priority of the
created in purely fictional form’ which are
Canadian taxing authorities’ claims.”
part of a ‘complex corporate structure’
That matter, the court noted, would
obscuring” the debtor’s ownership of
corporate assets.
“THE BANKRUPTCY have to be decided in the Canadian
COURT RULED THAT proceeding. Second, the court noted that
as a general matter, Chapter 15 courts
The Foreign Revenue Rule: THE REVENUE RULE DID are not in the business of adjudicating
In re Dixon
NOT APPLY BECAUSE the validity of foreign claims. Finally, the
court held that the case did not touch on
In re Dixon (Case No. 16-bk-02453, M.D.
Fla. March 23, 2016) illustrates Chapter IT WAS NOT BEING any fundamental U.S. public policies, as
15’s flexibility, as it required the court
to consider a novel application of the
ASKED TO “ADJUDICATE it was simply a dispute as between the
debtors and the foreign representative.
Foreign Revenue Rule to a Canadian OR RULE UPON THE In fact, the court found that it was
promoting the public policies underlying
trustee’s request for assistance.
The Canadian debtors commenced
VALIDITY OR PRIORITY not only Chapter 15 but the U.S.-Canada
proceedings in Canada under the OF THE CANADIAN tax treaty. As an aside, the court noted
that, to the extent the Canadian case
Bankruptcy and Insolvency Act. The
foreign representative subsequently filed
TAXING AUTHORITIES’ involved more than just tax claims, that
a Chapter 15 proceeding in the Middle CLAIMS.” would further support its conclusion that
the Foreign Revenue Rule does not apply.
District of Florida, seeking discovery
assistance related to the debtor’s assets
in the United States. When the foreign Judge Caryl Delano noted that the Conclusion
representative sought authorization to application of the Foreign Revenue Rule
These three Florida case descriptions
sell the debtors’ U.S. property in aid of in the Chapter 15 context was a matter
illustrate how Chapter 15 of the
the Canadian liquidation, the debtors of first impression. Traditionally, in non-
Bankruptcy Code has elements of both
filed their own bankruptcy case under chapter 15 contexts, courts would refuse
bankruptcy law and more traditional asset
Chapter 13 of the Bankruptcy Code and to permit a U.S. proceeding (whether
recovery tools. When considering whether
later sought to dismiss the Chapter in bankruptcy or not) to adjudicate tax
Chapter 15’s toolbox could help in the
15 proceedings. They argued that the claims under foreign laws. Section
asset recovery effort, it appears the sun is
Chapter 15 petition would violate the 1513(b)(2)(A) states that the language
shining in Florida’s bankruptcy courts.
Foreign Revenue Rule. in subsection (a) and paragraph (1) “do
not change or codify present law as
The Foreign Revenue Rule is “a long- to the allowability of foreign revenue
standing common law rule that prevents claims or other foreign public law
the courts of one sovereign from claims in a proceeding under this title.”
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Asset Recovery Hub E-Magazine: Issue 3 - Americas & Asia Focus
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Asset Recovery Hub E-Magazine: Issue 3 - Americas & Asia Focus
THE ECONOMIC FREEDOM
PROVISIONAL MEASURE AND OTHER
TOOLS AGAINST FRAUD IN BRAZIL
Henrique Forssell Octaviano Duarte Filho Felipe Vieira
Duarte Forssell Advogados Duarte Forssell Advogados Duarte Forssell Advogados
ARISING FROM THE PHILOSOPHICAL LOGIC OF THE SIXTEENTH CENTURY,
THE MODERN STATE ASSURES ENTREPRENEURS THAT THE RISKS OF A
BUSINESS ACTIVITY WOULD BE LIMITED TO THE SUBSCRIBED AND PAID-
IN CAPITAL.
Arising from the philosophical logic of n.º 8.078 / 90), the Brazilian Competition principals of a legal entity who have
the sixteenth century, the modern State Policy System (Art. 34 of the Law n.º committed insolvency fraud.
assures entrepreneurs that the risks 12.529/2011) the National Tax Code
of a business activity would be limited (CTN) as well as the Brazilian Civil Code
to the subscribed and paid-in capital. (Art. 50 of the Law n.º 10.406/2002) that Although the Provisional Measure
1
Thus, in return, they receive a favorable sets the general bases for the application is effective immediately, it needs to
environment to reduce unemployment of the disregard doctrine. be ratified and converted into Law
and to grow the tax revenue. However, by the Brazilian National Congress
On April 30, 2019 the Executive Branch within 120 days, after which it will
the same patrimonial autonomy that
of the Federal Government of Brazil lose its effectiveness. The National
justifies the organization of a business
issued Provisional Measure 881 (the so- Congress also has authority to propose
activity in a corporate form can lend
called “Economic Freedom Provisional amendments to the original language.
weight to the misuse of legal entities for
Measure”) amending, in part, the
illicit activities such as money laundering,
provisions of the Brazilian Civil Code The current Civil Code of Brazil was
tax evasion and others.
defining the requirements to pierce enacted in 2002. Since then, the
In order to prevent and/or remedy the the corporate veil, thereby clarifying standards of review used to disregard
misuse of a corporation, modern legal the parameters to be used by Courts the corporate veil of a legal entity in
systems started to adopt the Disregard to make shareholders and managers Brazil have often been considered to
Doctrine through which the corporate liable for the debts of a legal entity. be less demanding in contrast to those
veil can be lifted. So It becomes possible The Provisional Measure also added a applied in other jurisdictions such as
to access the assets of partners or new Article to Brazil’s Bankruptcy Law the United States or England & Wales.
managers that used the legal entity to 11,101/2005 to the effect that the “... According to Article 50 of the Civil
defraud creditors or divert assets in their extension of the effects of bankruptcy [to Code, in cases involving the abuse of a
own benefit. the assets of shareholders or managers corporate entity characterized either by
of a company] shall only be granted (a) a deviation from its stated corporate
As a Civil Law country, Brazil adopted
when the requirements to pierce the objects, or (b) the commingling of its
in its legislation similar mechanisms
corporate veil are present…”. assets with the assets of its principals
to lift the corporate veil and expand the
liability to assets of shareholders or This Provisional Measure has codified (sometimes translated as “confusion
administrators. Those provisions are most of the standards that have been of assets” or “patrimonial confusion”), a
scattered in micro-legal-systems such as developed and applied by Brazilian judge may disregard the veil and impose
the Consumer Code (art. 28 of the Law Courts to reach the assets of the an insolvent company’s obligations over
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Asset Recovery Hub E-Magazine: Issue 3 - Americas & Asia Focus
the assets of illicit corporate managers phrase “deviation from a company’s As a practical example, the abuse of the
or shareholders. stated purpose.” To persuade a Court to legal entity often can be materialized
pierce a corporate veil on this ground, an together with the following elements:
For almost two decades, creditors,
applicant must adduce evidence proving • the transfer of assets between
liquidators and judicial administrators
“the wilful utilisation of the corporate entities under the same corporate
have used this legal mechanism to
entity for the purpose of harming structure and/or management for a
successfully recover assets diverted
creditors and for the performance of illicit vile price or no consideration;
fraudulently. Leading cases such as
acts of any nature.” With respect to this
Banco Santos and Petroforte resulted in • granting of loans with very low
second form of abuse, the Brazilian Civil
over R$1 billion being recovered for the interest rates (or no interest rates)
Code now provides that the commingling
relevant estates as a result of effective in favor of the parent company on
of assets is the “lack of separation of
transnational investigative work. This a period close to the filing of an
patrimony”2 , characterized for example
was combined with legal measures in insolvency procedure or next to the
by a transfer of assets and liabilities
maturity of a credit;
without due consideration or by the
repetitive payment of obligations of a • lending of the main means of
“THE PROVISIONAL company by its shareholders/managers production to other subsidiaries with
no economic justification and/or for
or vice-versa.
MEASURE INCLUDES an unreasonable price;
Furthermore, there are other provisions
ANOTHER REQUISITE established by the Provisional Measure
• disproportional distribution of
dividends in comparation with the
ELEMENT TO LIFT THE which are particularly relevant in the
actual financial situation of the
context of insolvency fraud. Even before
CORPORATE VEIL ON the new Bankruptcy Law was enacted
company;
THE BASIS OF FRAUD.” in 2005, Brazilian Courts granted
applications to extend the effects of a
• mispreparation of the account and
tax books;
bankruptcy decree to third parties who To illustrate the reach of such tools
Brazil piercing the corporate veils of the were somehow involved in fraudulent (disregard doctrine and extension of
debtor companies and extending the acts harmful to creditors of an estate. bankruptcy effects), we can mention the
effects of bankruptcy over the assets The Provisional Measure incorporates Banco Santos case. The court extended
of the wrongdoers and their asset the case law that was developed by the effect of the bankruptcy decree to the
holding companies. leading bankruptcy fraud cases such as assets of a Panamanian entity, based on
Minister Nancy Andrighi’s judgment in an objective demonstration that (i) this
The Provisional Measure includes another
Petroforte Brasilero Ltda (STJ, August entity was used by the former controlling
requisite element to lift the corporate veil
2011), by providing that the “...extension executive of Banco Santos as a shell
on the basis of fraud. Article 50 of the
of the effects of a bankruptcy shall only to divert assets from the estate and
Civil Code has been amended to provide
be ordered when the requisite elements defraud creditors, and (ii) the Panamanian
that only shareholders or managers of
to pierce the corporate veil are present”.1 company had been managed in Brazil.
companies who directly or indirectly
benefit from abusive conduct may be
made liable to pay the debts of the legal
Under Brazilian law, “patrimony” is
“ALTHOUGH THERE IS A
2
entity that they manage or own. This
the net worth of an individual or legal
element of proof is consistent with most
of the decisions of the Superior Court
entity at any point in time, similar to
the concept of “estate” in common
HIGH LEVEL OF RECOVERY
of Justice (“STJ”) in Brasilia. It would
however appear to have been included in
law countries. DUE TO VEIL PIERCING
the Provisional Measure in response to The Provisional Measure goes on to state
PROCEDURES IN
a minority of judgments of lower courts
holding that a shareholder / manager may
– correctly - that the mere existence of BRAZILIAN INSOLVENCY
be made liable in spite of the absence of
a common economic group per se does
not authorize a judge to disregard the
COURTS, IT´S NOT
any evidence demonstrating that they
benefited from wrongdoing. This has been
corporate veil of a legal entity and make ALWAYS CLEAR WITCH
its shareholder / managers pay for the full
a particular issue with Labour Courts in amount of debts owed by an estate. LEGAL ENTITIES AND/OR
Brazil which have generally applied a less
rigorous standard of review in piercing However, within the context of an INDIVIDUALS ASSISTED
the corporate veil on the basis of a policy insolvency procedure, it is often noticed
that economic groups are created not to
ON THE FRAUD.”
choice favouring labour claims in response
to an employer’s insolvency. In this sense, maximize the efficiency of the business,
the Provisional Measure encourages the but rather to make it harder for a creditor
The Bankruptcy Court found that3
formation of capital for entrepreneurial or group of creditors to enforce their
“considering the evidence provided on
activities by assuring investors, rights towards the debtors. Meanwhile the
the file, there is no doubt that Offshore
shareholders and managers that they will parent company or equity shareholders
X, formally registered on behalf of Mr. Y
not be made liable to pay a company’s continue to experience a substantial
it is nothing more than a shell company
debts. There is an exception, in case they growth of their individual wealth. In such
under the management of Controller Z,
benefit from a fraud perpetrated against cases, bona fide third parties should not
created with the sole purpose to hide the
the company in which they are invested or be deprived of their credit rights due to
artwork acquired with funds diverted from
whom they serve. the patrimonial autonomy of a legal entity
Banco Santos. As Offshore X has been
that, in fact, had the sole purpose to serve
In addition, the Provisional Measure has manipulated to perform fraudulent acts
as an obstacle to a fair collection.
introduced a statutory definition for the with the purpose of harming creditors,
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Asset Recovery Hub E-Magazine: Issue 3 - Americas & Asia Focus
the legal entity shall be disregarded to was recognized abroad (such as in the This procedure, in our view, is a very
extending the effects of the bankruptcy United States through US Bankruptcy effective tool to investigate fraud once
to such corporation, thereby reaching Code Chapter 15 ancillary bankruptcy it provides the judicial means to gather
unlawfully diverted assets, especially proceedings), which resulted in the enough evidence to fulfill the law
the artworks.” recovery of tens of millions of dollars requirements as to the demonstration of
in assets. abuse of the legal entity that can lead to a
veil piercing order.
Although there is a high level of recovery
The actual names are omitted to
3
due to veil piercing procedures in Brazilian In practical terms, the Provisional
preserve the parties involved.
insolvency courts, it´s not always clear Measure does not actually create new
witch legal entities and/or individuals law. Instead, it merely codifies the
“THIS PROCEDURE, IN assisted on the fraud. The usage of
investments funds and several layers of
requisite forms of abuse developed
by the STJ and clarifies the applicable
OUR VIEW, IS A VERY companies incorporated both in Brazil and standard of review for the extension of
abroad often creates a complex corporate the effects of bankruptcy. It therefore
EFFECTIVE TOOL TO structure that blurries the tracing of funds incorporates into the relevant statues
INVESTIGATE FRAUD and the lines between what is a legitimate
or illegitimate operation.
the existing jurisprudence that had been
developed by the STJ and a majority of
ONCE IT PROVIDES For those situations and inspired by
the lower courts since the enactment
THE JUDICIAL MEANS common law legal systems, the Brazilian
of the Brazilian Civil Code in 2002. As a
result, it is not expected that the recent
TO GATHER ENOUGH Civil Procedure4 code introduced the
possibility of filing a claim for “anticipated
Provisional Measure will in any way
EVIDENCE TO FULFILL THE discovery5” from which the interested
adversely impact the ability of creditors,
liquidators and judicial administrators to
LAW REQUIREMENTS AS party will be able to examine witnesses,
produce evidence and require documents
recover assets diverted by fraud. Instead,
TO THE DEMONSTRATION from third parties or the target itself to
it clearly expresses the requisite grounds
to support an application to disregard
OF ABUSE OF THE LEGAL determine if and to what extent that entity
or individual participated in the fraud.
the corporate veil and to extend the
ENTITY THAT CAN LEAD Brazilian courts accepted that this
effects of a bankruptcy order over all of
the assets of those who benefit from
TO A VEIL PIERCING preliminary procedure be filed under fraud. The Provisional Measure places
seal and without the participation of the the effectiveness of measures to tackle
ORDER.” defendant at an early stage, once and creditor fraud in Brazilian insolvency
only if it is fairly demonstrated that the proceedings onto a solid and well
secrecy of the investigation is key to articulated statutory footing.
Thus, the bankruptcy court in Banco
avoiding the destruction of evidences,
Santos found it had jurisdiction to
creation of new corporate layers to
extend the effects of its bankruptcy
evade the enforcement of a court order Article 381, II and III
4
decree to the assets of a foreign entity
or the transfer of funds away from the Free translation: “Produção antecipada
5
in the context of a fraud, once it was
creditor´s reach. It has been ruled that de provas”
demonstrated that the Panamanian
this is not a question of violating the
company was an instrument used
rights of the defendant to counter the
to conceal assets taken from the
applicant, but rather to postpone in honor
estate; and that it was managed by
of the effectiveness of such procedure,
Brazilian resident individuals. The
due to a plausible justification.
Brazilian bankruptcy extension order
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9
Asset Recovery Hub E-Magazine: Issue 3 - Americas & Asia Focus
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10Asset Recovery Hub E-Magazine: Issue 3 - Americas & Asia Focus
BRAZILIAN HIGH COURT
DECISION DISREGARDS
CREDITORS’ GUARANTEES
Philip Hime
S-RM
A BRAZILIAN COURT DECISION TO INTENDED TO HELP A MATO GROSSO CAR
DEALERSHIP RECOVER FROM ITS FINANCIAL DIFFICULTIES COULD HAVE
IMPLICATIONS THAT REVERBERATE ACROSS THE BRAZILIAN ECONOMY.
A Brazilian court decision to which instruments such as guarantees which was approved by the majority
intended to help a Mato Grosso car were created: to enhance financial of creditors in a general assembly.
dealership recover from its financial transactions by reducing risk. It allows However, creditors with secured assets
difficulties could have implications the creditor to carry on its business voted against the plan.
that reverberate across the Brazilian without the concerns associated with
These creditors argued that the
economy. The Superior Court of a reorganisation plan and provides it
guarantees could not have been
Justice (STJ), the second-highest court certainty that it will receive its due –
supressed without their approval, as
of law in Brazil, overturned its own whether from the debtor or from the
they understood that these obligations
precedent and now allows debtors guarantor. However, this may no longer be
could not be affected by the judicial
to unilaterally supress personal true for Brazil.
recovery without their consent. Ariel
guarantees provided by third parties to
claimed that, as the plan was approved
their creditors in a reorganisation plan,
by the required majority, it overrode the
so long as the plan is approved at the “THE COMPANY’S PLAN creditors rights under the guarantees,
creditor’s general meeting.
INCLUDED THE RELEASE given that all debts were novated, i.e.,
replaced with the debt payment plan
Tried and tested dynamics OF ALL GUARANTEES, under the reorganisation process.
Before this landmark decision, Brazilian
courts understood that third-party
WHICH WAS APPROVED Aftermath
personal guarantees provided to creditors BY THE MAJORITY While the STJ award is only binding
in usual business transactions would not
be affected by the terms of the recovery
OF CREDITORS IN A between the parties involved in
plan, unless the creditors specifically GENERAL ASSEMBLY.” the Ariel case, the STJ award sent
shockwaves through the market in
agreed to release such guarantees.
Brazil. Financial institutions, which are
Hence, for example, if a company that
usually the largest guarantee holders in
had provided a bank guarantee to its The STJ’s new precedent
corporate reorganisation proceedings,
creditor filed for a reorganisation plan,
In a decision that stunned many legal are especially concerned: they could
the creditor could call on the guarantee
practitioners and market experts, be subject to large losses if their
to secure payment. The bank would then
the STJ analysed the case of Ariel guarantees are deemed unenforceable,
be subrogated into the original debt and
Automóveis, a car dealership in the given that, after judicial recovery, debts
would participate in the reorganisation
state of Mato Grosso which had filed are usually paid with a haircut.
plan in the creditor’s place.
for a reorganisation plan (known as
STJ justice Marco Aurélio Bellizze, the
This is a familiar dynamic in several “judicial recovery”). The company’s plan
author of the majority opinion in the
jurisdictions, and forms the basis for included the release of all guarantees,
case, stated that his decision was based
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11Asset Recovery Hub E-Magazine: Issue 3 - Americas & Asia Focus
on the fact that decisions approved majority opinion in Ariel, declared that his In any case, interested parties should
by the general assembly of creditors decision was at least partially intended remain seized of developments in
could not be overridden by a minority of to protect economic activity, by making this case. The STJ decision was not
interested parties. it easier for companies to recover from unanimous – two of five justices voted
financial hardship. 6 against it – which will certainly lead to
Naturally, the increased credit risk has
further tests of the court’s new position.
a direct impact in the cost Brazilian
companies pay to obtain financing
How can creditors protect
– which is a major concern for the their interests?
Supressão de garantias no plano de
6
Brazilian government, which has already While the Ariel award is very recent and recuperação aprovada em Assembleia
cut Selic (the Brazilian base interest rate) may still be appealed, there are some atinge todos os credores’, Migalhas, 3
to 6%, it’s lowest-ever level, in an attempt precautions that creditors can take to April 2019.
to stimulate economic activity following better protect their interests.
a four-year recession. However, STJ
justice Moura Ribeiro, who joined the Firstly, the STJ specifically carved out
in rem guarantees from the decision.
Therefore, this type of guarantee is still
“FIRSTLY, THE STJ protected from unilateral changes in the
reorganisation process.
SPECIFICALLY CARVED Second, and perhaps more interestingly,
OUT IN REM GUARANTEES the court’s opinion did not mention on-
demand guarantees and letters of credit.
FROM THE DECISION. Such instruments are usually issued in
THEREFORE, THIS TYPE the context of international trade or large
contracts, and are usually favourably
OF GUARANTEE IS STILL seen by creditors given that they can and
PROTECTED FROM should be construed to be separate from
the transaction or contract itself. As it only
UNILATERAL CHANGES comprises a third party’s obligation to pay
IN THE REORGANISATION a given amount to the beneficiary once a
claim is made, an on-demand guarantee
PROCESS.” would not be subject to be released.
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12Asset Recovery Hub E-Magazine: Issue 3 - Americas & Asia Focus
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13Asset Recovery Hub E-Magazine: Issue 3 - Americas & Asia Focus
THE RISE OF CYBERCRIME IN ASIA
PACIFIC AND CONSIDERATIONS FOR
ORGANISATIONS OPERATING IN
THE REGION
David Harby Lydia Redman
HFW HFW
1. Defining cybercrime and cybercrime to the APAC region alone11.
The Asia Pacific (APAC) region faces
an increasing rate of cybercrime 7 and
its cost
cases of serious digital asset theft 2. 10
“Cryptocurrency thefts and fraud
have occurred there in recent years. Cybercrime can be broadly defined as reach $1.2bn in Q1”. Nikkei Staff
This vulnerability is due to quicker computer related crime. The computer Writers. 23 July 2019. https://asia.
digital transactions and greater either is used as a tool to commit nikkei.com/Spotlight/Bitcoin-evolution/
internet connectivity combined with crime or acts as the target of a crime. Cryptocurrency-thefts-and-fraud-reach-
lacking cybersecurity investment A particular example is cryptojacking. 1.2bn-in-Q1
and low awareness8. As avenues for This type of attack concerns the 11
Cost of cybercrime continues to soar
transnational, digital payments diversify, unauthorised use of a computer to for Southeast Asian businesses.
APAC’s digital economy is undergoing mine cryptocurrencies. Cyberextortion https://asiancorrespondent.
significant growth9. Asia is also a hub often involves the threat of infection of com/2018/04/cost-of-cyber-crime-
for the investment and trade of valuable a device with ransomware to coerce continues-to-soar-for-southeast-asian-
digital assets. the recipient into submitting to a businesses/
As cybercriminals choose to operate demand. Cybercriminals have also
within APAC networks, it is unsurprising increased their capacity to launder Increased regulatory and
that the region is a focal point for the money, steal digital assets and hijack legal framework
development of regulation, legislation networks. Digital assets that are usually
5.
and digital asset recovery mechanisms. the subject of theft include personal
Governmental and regulatory bodies
information and data, trade secrets or
in APAC are recognising the need to
more commonly, cryptocurrency.
Financial Sector Cybersecurity
7 balance technological innovation with
3. risk management and user protection.
Requirements in the Asia-Pacific
Region. William A. Carter and William
Cryptocurrency is a sought-after asset. The following countries have made
D. Crumpler. April 2019. https://csis- The reported theft of the following progress in building the foundations
prod.s3.amazonaws.com/s3fs-public/ values of cryptocurrency took place in of a strong regulatory and legislative
publication/190429_CarterCrumpler_ 2019 alone10: framework, in which APAC’s digital
APAC_WEB.pdf (a) 4
.5 billion yen stolen from the economy can prosper.
Cyber Risk in Asia Pacific. The Case
8 cryptocurrency exchange Binance in 6.
for Greater Transparency. Marsh & Hong Kong, May 2019; In terms of regulation in Japan, the
McLennan Companies. (b) US$4.3 million stolen from Bitrue in Japan Network Security Association
Is APAC’s Desire to Lead Global
9
Singapore, June 2019; and and Japan’s Virtual Currency Exchange
Innovation in Digital Payments (c) 3 billion yen stolen from Bitpoint Association (JVCEA) are prominent
Working? A Tech Research Asia exchange in Tokyo, July 2019. bodies. The JVCEA is a self-regulatory
Report Commissioned by Temenos body that applies rules to protect assets
Group AG. https://www.temenos.com/ 4. and focuses on developing anti-money
globalassets/mi/wp/is-apac-s-desire- A study produced by the Center for laundering policy.
to-lead-global-innovation-in-digital- Strategic and International Studies
payments-working-.pdf reported that the global cost of 7.
cybercrime reached US$544.5 billion From a legislative perspective, Japan
in February 2018. A figure of US$171 has made noteworthy developments.
billion is reportedly the damages cost of Japan’s Parliament adopted the
Cybersecurity Basic Act in 2014. The
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14Asset Recovery Hub E-Magazine: Issue 3 - Americas & Asia Focus
Act outlines government responsibilities 9. 12.
and provides for the establishment of In Singapore, the Monetary Authority of Another mechanism for enabling the
cybersecurity strategic headquarters. Singapore provides a monitoring and tracking and recovery of cryptocurrency
In October 2016, the Diet approved regulatory function. The agency’s reach is the analysis tool “The Taint Chain”.
an amendment to the Act. The expanded to include additional payment This enables the tainting and tracking
amendment increased the scope of activities with the passing of the of stolen bitcoin. Developed by a team
parties which are subject to government Payment Services Act in January 2019. of researchers from the Department of
evaluation for cybersecurity purposes. This Act regulates payment systems Computer Science and Technology at
Special corporations and authorised and payment service providers in the University of Cambridge, the tool
corporations now fall within this scope. Singapore. Key objectives of this Act are employs an algorithm, which operates
to streamline the regulation of payment according to the FIFO (first in, first out)
services and to mitigate the risks principle. This is based on a well-known
“ALONGSIDE AN inherent in the payments value chain. English Chancery Court case12. The
case considers that the first person to
IMPROVING Mechanisms for recovery of have paid in is the first person to be paid
REGULATORY AND cryptocurrency out where funds are withdrawn from
a collective account. When applied to
LEGAL ENVIRONMENT, 10. bitcoin wallets, the principle holds that
PROGRESS HAS BEEN Alongside an improving regulatory
and legal environment, progress has
if the first bitcoins paid into the wallet
are stolen, then, (at least as a matter of
MADE IN THE REALM been made in the realm of research English law), the first bitcoins paid out
OF RESEARCH AND and development. are also considered stolen.
DEVELOPMENT.” 11.
Developments have been made in
13.
Whilst digital economic activity and
tracing stolen monies. The theft of growth continues in the APAC region,
8. US$534 million worth of NEM (XEM) the regulatory, technical and legal
In December 2016, the Hong Kong cryptocurrency from the wallets of framework must keep pace with rising
Monetary Authority launched the Japan-based exchange Coincheck opportunities for cybercrime. Although
Cybersecurity Fortification Initiative is one of the largest recorded rates of cybercriminal activity are high, we
aimed at banks and financial institutions cryptocurrency thefts in history. It believe the aforementioned developments
established in Hong Kong. Three pillars occurred in January 2018 and forced should inspire increasing confidence for
form the foundation of the initiative the exchange to consider ways of organisations within APAC.
- a Cyber Resilience Assessment tracking the stolen coins. The NEM
Framework, a Professional Development team developed an automated tagging
Programme and a Cyber Intelligence system, where stolen funds could be
12
Devaynes v. Noble 35 E.R. 781 (1816).
Sharing Platform. Notably, the purpose tagged as tainted. Once stolen funds
of the Platform is to store information, were deposited into regulated trading
data and intelligence on the subject of platforms, these deposits were verified.
cyber-attacks. Authorised users can Accounts that received the funds were
access this information and may find the tagged and other exchanges could
platform useful as the initiative develops. then be notified that they held these
accounts on their platform.
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15Asset Recovery Hub E-Magazine: Issue 3 - Americas & Asia Focus
ENFORCEMENT OF FOREIGN
JUDGMENTS IN DUBAI
Mary Young
Kingsley Napley
Almost six months ago Cabinet 2. That the order being enforced was enforcement (and which had been seized
Resolution No. (57) of 2018 concerning made in accordance with the law of of the enforcement action for the previous
the Executive Regulations of Federal that country and certified as such; 12 months) refused to continue dealing
Law No (11) of 1992 on the Civil 3. That the parties were summoned and and instead insisted that the matter be
Procedure Law (‘the Resolution’) came represented; passed to the Enforcement Judge.
into effect in the UAE. The Resolution 4. That the order is final and binding
There was no order issued within the
made significant amendments to the under the laws of the country in which
requisite three days by the Enforcement
UAE Civil Procedure Code (the Federal it was made, and is either certified as
Judge. Instead, the Enforcement Judge
Law No (11) of 1992 referred to in its such or states so within the judgment
tried to pass the file back to the Court
title) including in respect of: service of itself; and
which had initially been dealing with the
proceedings; requirements to include 5. That the order is not contrary to a
case. This has been followed by around
in proceedings certain information judgment or order of a UAE court and
10 weeks without a decision, and then
relating to the identification of the not contrary to the morals and public
by a rejection of the application, without
parties (corporate or individual); the order of the UAE.
any reasons or judgment given. Whilst
establishment of a fast track process
Article 88 of the Resolution confirms the solicitors I am working with in Dubai
for claims below a certain level of
that it is without prejudice to the have lodged an appeal, and made a
value; and the enforcement of foreign
provisions of any other treaties or complaint to the Court about how the
judgments and awards. In this article
agreements between the UAE and case has been dealt with, my client is
I am going to briefly focus on some of
other states. As such the New York still, over 24 months later, without an
the changes to enforcement and my
Convention will continue to apply to the order for enforcement in Dubai.
recent experience of trying to enforce a
enforcement of arbitral awards.
judgment of the Courts of England and
Wales in Dubai.
Conclusion
Appeal process We are hopeful that the Dubai Court of
Enforcement of Foreign The order of an Enforcement Judge Appeal will have a better understanding
Judgments, Orders and can be appealed to the Court of Appeal of the new Resolution and the intention
and the Court of Cassation, which that it should streamline and modernise
Instruments means that the expedition of the initial the enforcement process. Nonetheless,
Articles 85 – 88 of the Resolution cover order could be rendered nugatory if a at present the interpretation of the
enforcement of foreign judgments and defendant was to challenge the order Resolution in terms of enforcement of
orders and specify that the provisions through the available appeal processes. foreign judgments does not appear to
apply to arbitral awards as well as be assisting a great deal in terms of
judgments. Article 85 provides that Practical experience certainty, time or costs.
an order for enforcement shall be
I have been working with Dubai solicitors It is, of course, possible that once the
applied for by way of a petition directly
for more than two years, seeking to enforce Courts become more familiar with
to an Enforcement Judge and that the
a judgment obtained in the UK against a the Resolution they will embrace the
Enforcement Judge shall issue an order
fraudster (and in respect of which there changes it includes, leading to the
within three days of the submission of the
was no scope to refer the matter to the modernised, streamlined approach to
petition without notice to the defendant.
Courts of the DIFC). As such the efforts litigation and, in this particular instance,
That is, however, on the condition that the
have straddled the two regimes. The first enforcement of foreign judgments it was
following can be verified:
effect of the Resolution was that two intended to provide, but that remains to
1. That the UAE Courts do not have months after it came into effect, the court be seen.
exclusive jurisdiction over the dispute; which had previously been dealing with
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16Asset Recovery Hub E-Magazine: Issue 3 - Americas & Asia Focus
THE DISPUTES
POWERHOUSE
Geneva Zurich London
lalive.law
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17Asset Recovery Hub E-Magazine: Issue 3 - Americas & Asia Focus
BAHAMAS ASSET RECOVERY –
PRIVY COUNCIL DETERMINES
EXTRATERRITORIAL REACH
OF CLAWBACK CLAIMS
Sophia Rolle-Kapousouzoglou
Lennox Paton
The Privy Council has recently ruled office in Bermuda. The Liquidator
in the case of AWH Fund Ltd. (In therefore applied pursuant to Order 11
13
Section 160 of the International
Compulsory Liquidation) v ZCM Asset Rule 8(4) of the Rules of the Supreme
Business Companies Act (‘IBC
Holding Company (Bermuda) Ltd. [2019] Act’) 2000 provides: 160. (1) “Any
Court 1978 (‘RSC’)14 by way of an
UKPC 36 that an application seeking conveyance, mortgage, delivery of interlocutory Summons in the winding up
a declaration to set aside a fraudulent goods, payment, execution, or other act proceedings to serve ZCM outside of the
preference claim served on a third relating to property as would, if made jurisdiction.
party agent may be served outside of or done by or against any individual Under Bahamian law the legal test for
the jurisdiction even in the absence of trader, be deemed in the event of his the avoidance of fraudulent preferences
express statutory procedure governing bankruptcy to have been made or
is that the payment must be paid within
the extraterritorial jurisdiction to do so. done by way of undue or fraudulent
the requisite statutory time (ie. within
preference of the creditors of such
3 months prior to the commencement
traders, shall, if made or done by or
“THE RESPONDENT, A against any company, be deemed,
of the liquidation), and there must be a
dominant motive or intent to prefer a
BAHAMIAN MUTUAL in the event of such company being
wound up under this Act, to have been particular creditor over others.
FUND (“AWH FUND”) made or done by way of undue or The Privy Council in its ruling determined
fraudulent preference of the creditors
HAD BEEN PLACED of such company, and is invalid
that although there were no Rules
that governed the winding up of an
INTO VOLUNTARY accordingly. (2) For the purposes of
this section — (a) the presentation of
International Business Company
LIQUIDATION IN 2002.” a petition for winding up a company
(‘IBC’), the jurisdiction could be vested
in a Liquidator by way of the provisions
in the case of a company being
governing service out of the jurisdiction
wound up by the court or subject to
as contained in the Rules of the Supreme
The Respondent, a Bahamian Mutual the supervision of the court; and (b) a
resolution for winding up the company, Court and there was no need to have a
Fund (“AWH Fund”) had been placed
in the case of a voluntary winding up, substantive claim within Order 11 Rule
into voluntary liquidation in 2002. The
shall be deemed to correspond with 1(1) of the RSC in order to do so.
fraudulent preference as it is termed
under Bahamian law13 was alleged by the act of bankruptcy in the case of an The Board determined in the judgment
the Liquidator to have been made to individual trader, and any conveyance delivered by Lady Arden at paragraph
or assignment made by any company
ZCM (Asset Holding Company Bermuda) [39] that, “Times have moved on since
formed under this Act of all or any part
Ltd. (‘ZCM’), within three months the nineteenth century when the relevant
of its estate and effects to trustees
preceding the liquidation of AWH Fund. provision in bankruptcy were enacted,
for the benefit of all or any part of its
ZCM held the shares in AWH Fund on and it would not be surprising to find
creditors is void.”
behalf of American Express Alternative provision now being made for service
Offshore Ltd. (‘AMEX’) as its agent. The out” and further at [40] “it is now settled
The main issue considered by the Board
Liquidator filed an application by way law that insolvency provisions can have
on the appeal was whether the Supreme
of Summons seeking a declaration that extraterritorial effect”. The Board in its
Court of The Bahamas had jurisdiction
the payment made to ZCM in the sum of ruling cited Sir Donald Nicholls VC In
to serve an interlocutory Summons
approximately $13 million was wrongful Re Paramount Airways [1993] Ch 223
outside of the jurisdiction in winding up
by reason that it constituted an undue which was considered and, noted that,
proceedings seeking a declaration to
and/or fraudulent preference of ZCM and “Trade takes place increasingly on an
set aside a fraudulent preference claim.
is invalid accordingly. international basis. So does fraud.”
ZCM, is a company with its registered
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