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Partner, Head of International Litigation, Eterna Law
Partner, Head of IT-disputes Practice, Eterna Law
Address: Gulliver Business Centre, 1-A Sportivna Sq, 32 Floor, Kyiv, 01001, Ukraine
Tel.: +380 44 490 7001
ETERNA LAW is a full-cycle European law firm possessing strong expertise in the CIS region. Founded in 2002 in the Ukrainian capital, the firm has grown rapidly. We are continually named among market leaders for quality, responsiveness and reliability of service as well as for the depth of our expertise.
We are a dynamic, client-oriented and solution-focused firm whose team of energetic, foreign-educated young professionals provides concise and practical legal advice in a cost-effective manner, while not compromising on quality.
ETERNA LAW has an extensive history and experience within the CIS region. We understand these diverse markets, which demand international experience from a law firm in unison with knowledge of local business realities and the legal environment. It’s for this reason that we consistently act in some of the most high-profile matters in the CIS for a broad range of clients, such as international financial institutions and corporations across various industry sectors, Government entities, non-governmental organizations, etc.
We are an exclusive member of three lawyers association — PLG International Lawyers, Libralex, AIEL which gives us the possibility to cover more than 40 jurisdictions for the needs of our clients.
Effective Tools for Successful Cross-Border Debt Recovery
In this current age of globalization businesses are able to easily transfer and move their assets amongst various jurisdictions and each of them enforces its own laws and regulations. For dishonest debtors there are plenty of options to frustrate the enforcement of judgement by arranging a sophisticated network of offshore companies or secretly moving or concealing the location of their assets. Obtaining a court judgement or an arbitration award is no longer a guarantee to a creditor that the judgement will be fully enforced against the debtor’s assets or funds. Thus, debt recovery involving multiple jurisdictions becomes quite challenging and frustrating for a creditor.
Cross-border debt recovery is all about taking a proactive approach in getting to the debtor’s assets and funds before they are hidden or transferred beyond the reach of the creditor. Thus, in addition to recognition and enforcement proceedings against the debtor, a creditor has to engage a team of lawyers, financial investigators, forensic and technology specialist, who should run the whole gamut of tools and resources so as to identify, locate and secure the debtor’s assets.
Many businessmen and their businesses had a common and long-established view that offshore jurisdictions are surrounded by impassable walls that protect their assets and identities from their governments, creditors and debt recovery lawyers. However, the current trend in legislature and judicial thinking in many jurisdictions (including major offshore jurisdictions like the BVI, Cayman Islands) indicates that the courts will not tolerate abuse of offshore companies’ structures by dishonest businessmen. Moreover, for the sake of justice the courts in offshore jurisdictions are willing to create favourable conditions for creditors seeking to recover a debt or an asset from a dishonest debtor hiding behind an offshore entity.
In a cross-border debt recovery matter, as a starting point one can obviously benefit from various public sources and databases (like the Panama Papers, the Offshore Leaks, the Paradise Papers, the Lux and Swiss leaks to mention a few), which since 2015 have disclosed thousands of files on offshore companies and their beneficial owners. However, when it comes to sophisticated debtors and corporate structures, use of public sources is insufficient.
Businesses usually follow the same pattern of corporate structures, by using either the BVI, Cyprus or Caymans entities. So, it is advisable to resort to the various remedies developed by English courts and followed by the courts in most of the common law jurisdictions (for instance — the BVI, Cyprus or Cayman Islands). The two most commonly used are Norwich Pharmacal (third party disclosure orders) and Freezing/Mareva injunctions, both of which can assist creditors in identifying a debtor’s assets and enforcing debt judgements against them.
Norwich Pharmacal (Third Party Disclosure Orders) in Aid of Enforcement Proceedings
Norwich Pharmacal (“NP order”)1 is a special court order for disclosure of information and/or documents by a third party, who was involved in wrongdoing (possibly innocently) against the applicant. Initially, this type of order was used as a pre-trial remedy in order to assist a prospective claimant in identifying the wrongdoer. However, with the passage of time its application has been expanded to include banks (see the Banker Trust2), corporate service providers and registered agents, Internet providers and even the police. Subsequently, English Courts have also recognised that a NP order can be granted as a post-judgement remedy — to locate the debtor’s assets against which a judgement or an award can be enforced.3
I) it has been a victim of a wrongdoing (in terms of post-judgement stage proceedings — it is sufficient to establish that the debtor wilfully evaded payment of the judgement);
II) there is a real prospect that the respondent to an application has been “mixed up” in some wrongdoing (i.e. not a mere witness) and has relevant information and documents; and
III) such an order is necessary and proportionate in all the circumstances.
Along with the NP order, an applicant may and, usually does, request a so-called “gagging order”, which prohibits a defendant to the application from informing the debtor (respondent) on the issuance of a NP order and disclosing information/documents to the applicant. Such a measure is necessary so that the debtor is not tipped off about the proceedings by its bank or registered agent.
Common law jurisdictions courts (beyond England and Wales) also confirm and follow the principles and case law established by English courts. One of the latest examples of NP orders granted by the BVI Court in support of enforcement of foreign judgement is the case UVW vs XYZ (A Registered Agent) BVIHC (COM) 108 of 2016. In this case the debtor failed to comply with a freezing and disclosure orders in ongoing proceedings, but also failed to honour a number of court judgements from a civil law jurisdiction. The creditor identified a BVI registered company owned by the debtor, which held a substantive asset. The creditor successfully sought a NP order for disclosure of documents/information from a registered agent of this BVI entity in support of the enforcement proceedings against the debtor.
The recent Cayman Island case of ArcelorMittal USA LLC vs Essar Global Fund Limited & Anor  EWHC 724 (Comm) indicated the same favourable approach and readiness of the Caymans Court to grant a NP order for the benefit of a creditor. In this case the creditor successfully sought from the defendants disclosure of documents and information to support its recognition and enforcement proceedings of the ICC Arbitration award against the debtor. The court of first instance recognised that failure by the debtor to honour the arbitration award and pay USD 1.5 billion was tantamount to wrongdoing against the applicant, which was one of prerequisites of the Norwich Pharmacal jurisdiction. It should also be mentioned that the court’s order was upheld on appeal.
Freezing Injunctions in Support of Enforcement Proceedings
A freezing order or injunction (also referred to as the Mareva)4 is a special type of interim remedy granted by the courts, prohibiting the respondent removing, disposing of or diminishing the value of its assets up to a certain value. To some extent, based on Chabra5 jurisdiction, freezing orders can be obtained against non-parties to substantive proceedings if there is a good reason to suppose that the assets of non-parties are, in fact, owned/controlled by the debtor.
Freezing orders are usually used as a pre-judgement tool, whose purpose is to preserve the debtor’s assets from dissipation pending the consideration of the case and rendering of the final judgement against the debtor. Depending on the circumstances, different types of assets can be frozen — e.g. shares, bank accounts, vehicles, investments, property and so forth.
In order to obtain a freezing order, an applicant has to establish that:
I) there is a good arguable case;
II) the respondent possesses assets;
III) there is a real risk of dissipation of those assets by the respondent, unless the freezing order is given; and
IV) the issuance of the order will be just and convenient.
It is also well established that freezing orders can be obtained against the debtor to assist enforcement proceedings once a creditor has obtained a money judgement or award. However, unlike orders issued at the pre-judgement stage, post-judgement freezing orders may continue without any limit in time until the debt is paid by the debtor or further order of the court (in case the debtor was able to pay the debt at any point, but chose not to do so).
As an additional benefit to a freezing injunction, the court usually orders the debtor to state his assets and their value. This can also assist a creditor in identifying and attaching the debtor’s assets elsewhere. However, if the debtor chooses not to comply with the order he may be found in contempt of the court, which will result in a fine or imprisonment for up to 2 years.
Unlike the Cayman Islands and Bermuda courts, BVI courts tend to display a rather favourable position and to allow Mareva freezing orders against debtors in support of enforcement proceedings. In the recent case of Donna Union Foundation v Koshigi Limited and Svoboda Corporation BVIHC (COM) 20 of 2018, the court reconfirmed this approach and, on the basis of the facts in this case, was content to not only grant a Mareva freezing order against the defendants, but also receivership and disclosure orders. This case is one of many illustrations of the willingness of BVI courts to ensure that the assets of dishonest debtors are preserved and debtors do not evade their liability in a debt recovery matters.
It is frustrating for a successful creditor to win a money judgement or award after lengthy proceedings and then have to go back to square one and start chasing a debtor and/or its assets to collect the debt. However, the key to successful cross-border debt recovery is a mixture of investigative strategy, various judicial tools (like Norwich Pharmacal and Mareva) that are available against dishonest debtors and a specialist team of legal counsels to lead the case.
1 The name is delivered from the name of the case, which established this principle — Norwich Pharmacal Co v Commissioners of Customs & Excise  AC 133
2 Bankers Trust v Shapira  1 WLR 1274
3 Mercantile Group (Europe) AG v Aiyela 
3 WLR 1116
4 Mareva Compania Naviera S.A. v. International Bulkcarriers S.A. 2 Lloyd’s Rep. 509
5 TSB Private Bank International SA v Chabra 
1 WLR 231