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UTILIZING CROSS-BORDER INSOLVENCY LAWS TO ATTACK FRAUD

UTILIZING CROSS-BORDER INSOLVENCY LAWS TO ATTACK FRAUD. AN ANALYSIS ON HOW IT COULD WORK THE BRITISH VIRGIN ISLANDS, THE UNITED STATES AND THE GERMAN EXPERIENCE PRESENTED BY Martin Kenney Joseph J. Wielebinski Bernd Klose. UTILIZING CROSS-BORDER INSOLVENCY LAWS TO ATTACK FRAUD.

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UTILIZING CROSS-BORDER INSOLVENCY LAWS TO ATTACK FRAUD

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  1. UTILIZING CROSS-BORDER INSOLVENCY LAWS TO ATTACK FRAUD AN ANALYSIS ON HOW IT COULD WORK THE BRITISH VIRGIN ISLANDS, THE UNITED STATES AND THE GERMAN EXPERIENCE PRESENTED BY Martin Kenney Joseph J. Wielebinski Bernd Klose

  2. UTILIZING CROSS-BORDER INSOLVENCY LAWS TO ATTACK FRAUD The British Virgin Islands Experience presented by: Martin S. Kenney, Esq. Elizabeth O´Brien, BL Martin Kenney & Co., Solicitors The Law Library Second Floor, Geneva Place Building The Four Courts Road Town, Tortola Dublin 1 British Virgin Islands Ireland The United States experience presented by: Joseph J. Wielebinski, Esq. Davor Rukavina, Esq. Munsch Hardt Kopf & Harr, P.C. 500 North Akard Street, Suite 3800 Dallas, Texas 75201-6659 United States of America The German Experience presented by: Rechtsanwalt Bernd H. Klose Fachanwalt für Insolvenzrecht, CFE Am Houiller Platz 4 61381 Friedrichsdorf Germany Presented at the FraudNet Conference London, England, 22. September 2006

  3. Introduction– Fraudsters Limited • Fraudsters Limited (“Fraudsters”) – BVI Company • Fraudsters issued promises and undertakings to investors in: • Norway • Ireland • UK • Israel • Dubai and elsewhere. • Total value of outstanding liabilities exceeds US$250 million. Presented at the FraudNet Conference London, England, 22. September 2006

  4. „Fraudsters Limited“ – The Case Presented at the FraudNet Conference London, England, 22. September 2006

  5. THE BRITISH VIRGIN ISLANDSEXPERIENCEThe British Virgin Islands Corporate Insolvency Regime – An Overview

  6. Plan of Action • Petition the Supreme Court of the Eastern Caribbean (BVI) for an order appointing a liquidator and winding up the affairs of the company. • The liquidator’s mandate and purpose will be to: • identify, locate and assist creditors and victims to file sworn Proofs of Claim in the BVI insolvency proceedings; • identify and locate documents • begin the process of identifying who the primary fraudsters might be so as to commence the process of a reverse; and • locate evidence of the path of progress of value from the point of Fraudsters’ receipt of the same from investors. Presented at the FraudNet Conference London, England, 22. September 2006

  7. Fraudsters’ Assets • Fraudsters has two assets of interest in the United States: • (i) a bank account in New York; and • (ii) Fraudsters United Inc., a wholly-owned subsidiary located in Dallas, Texas - organised as a Texas company that owns: • bank accounts in: • Florida • Canada • Assets in Germany Presented at the FraudNet Conference London, England, 22. September 2006

  8. The British Virgin Islands Corporate Insolvency Regime – An Overview • BVI - British Overseas Territory • One of the world’s largest offshore providers of companies • One of the most up-to-date and comprehensive company insolvency regimes in the common law system • Principal trial Court - Supreme Court of the Eastern Caribbean at the BVI. • Insolvency Act 2003 (the “Act”) modelled on the English Insolvency Act 1986 • Detailed sections governing, inter alia, Creditors’ Arrangements; Administration; Receivership including Administrative Receivership and Liquidation • Introduced the concept of shadow directors; the licensing of insolvency practitioners; and rules governing the disqualification of directors Presented at the FraudNet Conference London, England, 22. September 2006

  9. Appointment of Liquidator • A liquidator (a licensed insolvency practitioner) may be appointed by • (1) a resolution of the members of the company passed by a super majority of 75% of all members present or represented at a meeting of members; or • (2) the Court on the application of the company itself, a creditor, member, supervisor of a creditors’ arrangement, the BVI Financial Services Commission or the Attorney General. • A liquidator may be appointed by the Court on any one of the following grounds:- • (a) that the company is insolvent; • (b) that it is ‘just and equitable’ that a liquidator be appointed; or • (c) that liquidation of the company is in the public interest. • The Court can also appoint a liquidator over a foreign companyif • the company has or appears to have had assets in the BVI; • is carrying on or has carried on business in the BVI; or • there is a reasonable prospect that the appointment will benefit the creditors of the company Presented at the FraudNet Conference London, England, 22. September 2006

  10. Appointment of Liquidator • The Act expressly describes: • the status, powers and duties of the liquidator; • the procedure for the removal and resignation of the liquidator; and • includes detailed provisions for the conduct of liquidations. • On appointment the liquidator: • Has custody and control of the assets of the company • Must advertise the fact of his appointment both in the BVI and in the company’s principal place of business • Is required to call a meeting of the creditors within 14 days of his appointment. • Liquidator appointed by the members can be removed and replaced by a liquidator nominated by the creditors • No obligation to call a meeting of the creditors if the company is solvent and notice is given to creditors that no meeting will be held unless creditors elect otherwise Presented at the FraudNet Conference London, England, 22. September 2006

  11. Voidable Transactions • Unfair preferences - a transaction that has the effect of putting a creditor in a better position than that in which he would have been in a liquidation • Transaction at an undervalue - where consideration is significantly more then the value of the asset received. • Such transactions likely to be set aside if • (a) entered into at a time when the company was insolvent or • (b) caused the company to become insolvent • Court can also set aside certain floating charges and extortionate credit transactions • Specified period prior to the onset of liquidation or administration • Focus is upon the objectively discernable effect rather than the subjective focused intent of the transaction • Court has discretion as to the type of order it may make e.g.: • orders for restoring the position to what it would have been if the company had not entered into the transaction, • the variation of the terms of an extortionate credit transaction, • the re-transfer of assets to the company • the release or discharge of any security given by the company Presented at the FraudNet Conference London, England, 22. September 2006

  12. Malpractice and Disqualification Orders • Liquidators have wide powers to recover and restore the company’s assets in cases of actions involving misfeasance, fraudulent trading and insolvent trading • Court can make an order against a delinquent officer of a company - guilty party may be ordered to restore the assets to the company or pay compensation • If Business carried on with intention to defraud creditors Court may order that any party to the fraud make a contribution to the assets of the company • Insolvent trading provisions only relate to directors and former directors • contribution to the company’s assets where he knew, or ought to have known • Court may make disqualification orders barring delinquent individuals from acting as • director, • insolvency practitioner, • receiver or • from being concerned in the management of a company for a specified period • Application for such an order may be made up to 6 years after the company became insolvent Presented at the FraudNet Conference London, England, 22. September 2006

  13. Licensing System for Insolvency Practitioners • The Act provides for a new system of licensing insolvency practitioners • Only BVI resident may be licensed • Non resident can be appointed jointly with a locally resident licensed insolvency practitioner • Only an insolvency practitioner may act as an • administrator • administrative receiver • liquidator • provisional liquidator • interim supervisor under a proposal for an arrangement or supervisor of an arrangement Presented at the FraudNet Conference London, England, 22. September 2006

  14. International Insolvency and the Assistance Provisions • Sections dealing with cross-border insolvency and international assistance are incorporated into Parts XVIII and XIX of the Act • Based on the UNCITRAL Model Cross-Border Insolvency Law • Detailed provisions setting out the basis for the recognition of foreign proceedings and appointments • The Act clarifies the law in relation to power of BVI Court to make requests to the English Court under section 426 of the English Insolvency Act • The stated purpose of Part XVIII is:- • “…to provide effective mechanisms for dealing with cases of cross border insolvency • Under Part XIX foreign representative may apply to the BVI Court for an order in aid of a foreign proceeding in respect of which he is authorised Presented at the FraudNet Conference London, England, 22. September 2006

  15. Part XVIII • Part XVIII applies where:- • assistance is sought in the BVI by a foreign Court or a foreign representative in connection with a foreign proceeding; • assistance is sought in a foreign country in connection with a BVI corporate insolvency proceeding; • a foreign proceeding and a BVI insolvency proceeding in respect of the same corporate debtor are taking place concurrently; or • creditors or other interested persons in a designated foreign country have an interest in requesting the commencement of, or participating in, a BVI corporate insolvency proceeding • Section 458 provides that the Court must cooperate to the “maximum extent possible” • Section 460 provides that such cooperation may be implemented by any appropriate means Presented at the FraudNet Conference London, England, 22. September 2006

  16. Recognition of Foreign Proceeding • Once foreign proceeding has been recognised foreign representative may apply directly to the Court for any other relief available under Part XVIII • Court or an insolvency office holder may provide additional assistance to a foreign representative where permitted • Once foreign main proceeding has been recognised, no individual proceedings may be commenced for any relief regarding a debtor’s property and all extant proceedings or execution against a debtor’s property in the BVI are stayed …. Presented at the FraudNet Conference London, England, 22. September 2006

  17. … Recognition of Foreign Proceeding • Act also provides that after recognition of a foreign main proceeding, a BVI insolvency proceeding may only be commenced if the debtor has assets in the BVI; and that the BVI proceeding must be restricted to assets of the debtor in the BVI. • Where concurrent foreign proceeding and BVI insolvency proceeding Court must seek cooperation and coordination • If the foreign proceeding is pending when BVI insolvency proceeding takes place no stay or suspension will come into effect • Foreign creditors are afforded the same rights as creditors in the BVI in respect of the commencement of and participation in a BVI insolvency proceeding Presented at the FraudNet Conference London, England, 22. September 2006

  18. Part XIX • Foreign representative may apply to the BVI Court under Section 467(3) for an order in aid of a foreign proceeding • Court has extensive powers to grant relief to a foreign representative • In making an order under Section 467(3), the Court may apply the law of the BVI or the law applicable in respect of the foreign proceeding • In determining an application under Section 467, the Court shall be guided by:- • “…what will best ensure the economic and expeditious administration of the foreign proceeding to the extent consistent with:- • (a) the just treatment of all persons claiming in the foreign proceeding; • (b) the protection of persons in the Virgin Islands who have claims against the debtor against prejudice and inconvenience in the processing of claims in the foreign proceeding; • (c) the prevention of preferential or fraudulent dispositions of property subject to the foreign proceeding, or the proceeds of such property; • (d) the need for distributions to claimants in the foreign proceedings to be substantially in accordance with the order of distributions in a Virgin Islands insolvency; and • (e) comity.” Presented at the FraudNet Conference London, England, 22. September 2006

  19. Urgent Relief • Where application for recognition filed although not yet determined application for urgent relief may be made if the Court is satisfied • that such relief is urgently needed to • protect the assets of the debtor or • the interests of the creditors. • The Court may grant “such relief of a provisional nature as it considers appropriate” including • (a) staying execution against the debtor’s assets; • (b) entrusting the administration or realisation of all or part of the debtor’s assets located in the BVI to the foreign representative or to another person designated by the Court in order to protect and preserve the value of assets • (c) granting any relief mentioned in Section 454(1)(c), (d) and (f).22 Presented at the FraudNet Conference London, England, 22. September 2006

  20. International Co-operation • Promotion of application of Parts XVIII and XIX in manner consistent with application of similar laws adopted by foreign jurisdictions • Relevance of Section 426 of the Insolvency Act 1986 and English case law interpreting and applying that provision • Hughes v. Hannover Riickversicherungs-Aktiengesellschaft • Re. Bank of Credit and Commerce International SA • BVI usual practice is to issue a Letter of Request to a foreign Court requesting assistance • Re. Trading Partners Limited • BVI must now cooperate “to the maximum extent possible” with foreign Courts or foreign representatives from foreign countries “designated” by Statutory Instrument • Australia • Canada • Finland • Hong Kong • Japan • Jersey • New Zealand • United Kingdom, and • United States of America Presented at the FraudNet Conference London, England, 22. September 2006

  21. Tools for Local Investigation in the BVI by the Liquidator • BVI counsel recommends immediate ex parte application for Norwich Pharmacal/Bankers Trust relief • against local BVI company formation and administration concerns • requiring copies of all directions and instructions from outside of the BVI in respect of these companies • requiring copies of all electronic funds transfer advices or cheques • BVI High Court can order first seal and gag for maximum period of twenty-eight (28) days • Duration of seal and gag may be extended prior to expiry of this twenty-eight-day period. Presented at the FraudNet Conference London, England, 22. September 2006

  22. What Can the BVI Liquidator of Fraudsters Do Abroad • New York bank account - US$5 million • Assets of Fraudsters United Inc. - US$5 million • Freeze known assets and raise further funds from creditors • Requests for Judicial Assistance Abroad to bankruptcy or insolvency Courts in • Canada • United States • Germany Presented at the FraudNet Conference London, England, 22. September 2006

  23. Influence of National Money Laundering Rules in the BVI • BVI Financial Services Commission regulates and enforces local money laundering laws • Detailed KYC Rules imposed on the offshore financial services community • KYC Documentation can prove useful • Theoretical possibility only of collision between the modern proceeds of crime legislation in the BVI and the insolvency of a BVI company • If there were such a clash decisions from Australia and other parts of the Commonwealth indicate that • (a) the rules and legal norms governing the administration of insolvent companies have over one hundred years of development; • (b) the rules pertaining to the forfeiture or seizure of the proceeds of crime are virtually brand new in contrast; and • (c) these new rules could not possibly have been intended to be used by the State for the purpose of disrupting the legitimate and bona fide private property rights of creditors or victims Presented at the FraudNet Conference London, England, 22. September 2006

  24. A Practical Problem in Seeking Recognition Powers • Classic corner stones to an ancillary insolvency proceeding abroad • Assets • Location of a place of business • Location of creditors in a particular foreign jurisdiction • In fraud investigations and insolvencies existence of place of business or location of assets abroad may not be known • Information = valuable asset of a foreign debtor in a tracing case • If information that would advance the trace is reposed in a foreign country -the foreign Court should have power to assist. • Article 27 of the UNCITRAL Model Law emphasizes the importance of cooperation • Cooperation may be implemented by any appropriate means • Cross-border cooperation is a core element • Objective is to enable Courts and insolvency administrators from two or more countries to be efficient and achieve optimal results Presented at the FraudNet Conference London, England, 22. September 2006

  25. Conclusion • BVI is an important jurisdiction in terms of investigating and suppressing global economic crime and fraud • The new insolvency regime represents an important tool in the toolkit of any serious multi-jurisdictional fraud recovery lawyer • The Act represents a gigantic leap forward for legal and accounting professionals involved in complex fraud investigations Presented at the FraudNet Conference London, England, 22. September 2006

  26. THE UNITED STATES EXPERIENCEChapter 15 of the United States Bankruptcy Code

  27. Scope And Purpose Of Chapter 15  It is the main access point for a foreign representative of a foreign proceeding to gain access to courts in the United States for broad relief (similar to bankruptcy relief given domestic companies);  In addition to governing foreign proceedings, Chapter 15 governs the authority of the Bankruptcy Court and its representatives to act in a foreign country. Presented at the FraudNet Conference London, England, 22. September 2006

  28. Presented at the FraudNet Conference London, England, 22. September 2006

  29. Enactment Of Chapter 15 Chapter 15 is an entirely new chapter of the United States Bankruptcy Code  Chapter 15 took effect on October 17, 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA");  Chapter 15 adopts the UNCITRAL Model Law on Cross-Border Insovlency; and  Replaces former §304, cases ancillary to foreign proceedings. Presented at the FraudNet Conference London, England, 22. September 2006

  30. Preliminary Considerations: Determine Whether and When to Use Chapter 15 • Chapter 15 is effective, readily available, strong, flexible and comprehensive; • It can be very expensive: • contested, evidentiary hearing; • Strict notice and service requirements; • May cause critical delay; • Reluctant, inexperienced and unfriendly Bankruptcy Court; • May solve immediate problems but the Court will undoubtedly impose requirements/conditions on Liquidator; • Tactical reasons to consider other options before Chapter 15; and • The Court may not allow relief for extraneous reasons. Presented at the FraudNet Conference London, England, 22. September 2006

  31. Advantages of Chapter 15 • Four primary advantages: • Effective control over the fraudsters' assets; • Ability to obtain injunctive and “other appropriate relief” before recognition; • Benefits of the automatic stay; and • Right to avoid transfers. Presented at the FraudNet Conference London, England, 22. September 2006

  32. Control • Once Chapter 15 petition is recognized, foreign representative has the powers given a trustee in a domestic bankruptcy proceeding; • Trustee can operate the business; • Trustee can sell the company with court approval, after notice and a hearing; and • Immediate control over all assets including documents, cash, all other assets wherever located. Presented at the FraudNet Conference London, England, 22. September 2006

  33. Automatic Stay Under Chapter 15 A broad injunction that prohibits any act to seize, control, encumber, recover or execute on Debtor’s assets. • Arises automatically; • Chapter 15 stay is broader than domestic bankruptcy stay and court can ignore various exceptions “if appropriate and necessary”; • Severe penalties (including actual and punitive damages) for intentional violation; • May not stop determined fraudsters and their cronies; • Includes actions fraudsters typically take to delay/frustrate Liquidator’s efforts; and • Litigation cannot proceed. Presented at the FraudNet Conference London, England, 22. September 2006

  34. Unique Benefits of Chapter 15 • Once petition recognized, foreign representative can sue (and be sued) in any court in United States; • Right to intervene in 3rd party litigation; • Court gives significant flexibility in fashioning appropriate relief; and • Court and Court personnel authorized and directed to cooperate with foreign representative and foreign court to maximum extent possible. Presented at the FraudNet Conference London, England, 22. September 2006

  35. Unique Drawbacks of Chapter 15 • Treaty trumps all other laws including Chapter 15; • Court obligated to consider public policy considerations in granting Chapter 15 relief; • If Chapter 15 relief denied, Court can enter order preventing foreign representative from getting similar relief in other United States courts. Presented at the FraudNet Conference London, England, 22. September 2006

  36. Mechanics of Chapter 15 • Commenced by “foreign representative” filing with the Bankruptcy Court a “petition for recognition of foreign proceeding” under Chapter 15; • Recognition requires a simple, expeditious examination of the eligibility of the foreign proceeding and the credentials of the foreign representative. Presented at the FraudNet Conference London, England, 22. September 2006

  37. Recognition • The procedure is similar to that for an involuntary petition and requires service of the petition and a summons on the debtor, any entity against which provisional relief is sought and any other parties as the court may direct. • The court shall decide the application for the recognition “at the earliest possible time.” Presented at the FraudNet Conference London, England, 22. September 2006

  38. Petition for Recognition • The petition must be accompanied by (1) a certified copy of the decision commencing the foreign proceeding and appointing the foreign representative, (2) a certificate from the foreign court affirming the existence of the foreign proceeding and the appointment of the foreign representative, or (3) in the absence of evidence described in (1) or (2), any other evidence acceptable to the court (4) a statement identifying all other foreign proceedings of the debtor; • The court is authorized to presume several important pre-conditions to recognition. Presented at the FraudNet Conference London, England, 22. September 2006

  39. What Is A Foreign Representative? • Filed by a “foreign representative”; • The foreign representative of a foreign proceeding must be a person or body authorized in the foreign proceeding to administer reorganization or liquidation of debtor’s assets and affairs. Presented at the FraudNet Conference London, England, 22. September 2006

  40. What Is A Foreign Proceeding? • To be eligible for Chapter 15 recognition, a foreign proceeding must meet the definitional elements of §101(23). The foreign proceeding must be: • A collective judicial or administrative proceeding in a foreign country; • For the purpose of reorganization or liquidation; • Under a law relating to insolvency or adjustment of debt in which the assets and affairs of the debtor are subject to control or supervision by a foreign court. Presented at the FraudNet Conference London, England, 22. September 2006

  41. Chapter 15 Eligibility • A foreign proceeding pending in the country where the debtor has the center of its main interests will be a foreign main proceeding; • A foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment will be a foreign nonmain proceeding; - A foreign proceeding based solely on presence of assets in the foreign country will not be eligible for recognition. Presented at the FraudNet Conference London, England, 22. September 2006

  42. Ineligible Entities/Assets • Bankruptcy Code prohibits some domestic entities from filing relief: • Paradoxical if foreign entity could qualify for Chapter 15 relief if it could not qualify if it was a domestic entity; • Railroads • Domestic Insurance Companies • Domestic Banks • Stockbroker/Commodity Broker • In rem limitations • deposits, escrows, trust funds or securities under insurance law or regulations for the benefit of holders in the U.S. Presented at the FraudNet Conference London, England, 22. September 2006

  43. Limited Relief Available in Chapter 15 • Limited relief is available under §1519 on an emergency basis between the time of filing the petition for recognition and the entry of an order granting recognition. • While the petition for recognition of a foreign proceeding must “be decided upon at the earliest possible time,” there will be a gap between the time of filing the petition and the entry of the order granting or denying recognition; • Provisional relief is varied and typically includes remedies available to a trustee in a domestic bankruptcy; • Delivery of assets to the foreign representative prior to recognition is limited; and • Police or regulatory actions may not be stayed under §1519. Presented at the FraudNet Conference London, England, 22. September 2006

  44. Presented at the FraudNet Conference London, England, 22. September 2006

  45. What Should the BVI Liquidator Do? • Assume the BVI Liquidator qualifies as a “foreign representative” and the BVI proceeding is a “foreign main proceeding”; • Initiate the steps to file for relief under Chapter 15; • Where to file the Chapter 15 petition; • Assume the necessary elements for injunctive relief can be established, the BVI Liquidator should request broad preliminary relief. • Decide what to do with Fraudsters United; • Give consideration to a separate bankruptcy proceeding; • Take appropriate steps under Part XIII: International Insolvencies of the Bankruptcy and Insolvency Act of Canada. Presented at the FraudNet Conference London, England, 22. September 2006

  46. Presented at the FraudNet Conference London, England, 22. September 2006

  47. THE GERMAN EXPERIENCESect. 335 ff German Insolvency Act

  48. Presented at the FraudNet Conference London, England, 22. September 2006

  49. The German Experience • Rules for International Insolvencies amended in 2003 on basis of Council Regulation (EC) No. 1346/2000 of Insolvency Proceedings • Principle Rule: sect. 335 Insolvency Act • Foreign Insolvency Proceedings themselves and their effects are governed by the law of the state opening the proceedings (lex fori concursus) and recognized automatically Presented at the FraudNet Conference London, England, 22. September 2006

  50. The German Experience • Assets located in Germany are treated as part of the foreign bankruptcy estate • Consequences: • Foreign Liquidator is exclusively authorized domestically to manage and dispose of the debtor‘s assets • Lex fori concursus decides if the bankrupt‘s estate receives legal capacity and is represented by the Liquidator Presented at the FraudNet Conference London, England, 22. September 2006

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