In most jurisdictions, liquidators retain extensive powers to investigate the affairs of an insolvent estate, especially to uncover and remedy suspected wrongdoing. In the right circumstances, insolvency practitioners (“IPs”) and bankruptcy trustees can therefore prove invaluable when seeking to recover funds on behalf of creditors, especially those that have been obtained fraudulently.
Liquidators have a right to full access to the company’s or debtor’s financial records and can compel the delivery of documents from directors, officers, and third parties. They can typically also examine directors and other associated individuals under oath, as well as identifying and challenging transactions that unfairly benefit certain creditors or involve asset stripping. Their sweeping powers further extend to referring matters to law enforcement or regulatory bodies and suing directors or other parties for breach of duty, negligence, or fraudulent trading where necessary.
These wide-ranging powers can often be invaluable in funded asset recovery cases. In certain circumstances and in some jurisdictions, having a liquidator, a bankruptcy trustee or a receiver appointed can be the only way of tracing misappropriated assets or securing admissible evidence from company insiders, proxies or third parties. Without them, examining former directors under oath, for example, or compelling discovery, may either take longer or not be possible at all. According to Ailar King, director at Interpath Advisory:
The UNCITRAL Model Law on Cross Border Insolvency (1997) can significantly aid liquidators and bankruptcy trustees by unifying the procedure through which they can be recognised outside their home countries. This framework aims to facilitate cross-border insolvency by promoting cooperation among courts and insolvency practitioners through four key elements: access, recognition, relief (assistance), and cooperation. As of today, it had been adopted in 65 jurisdictions.“The Insolvency Act 1986 provides IPs with very wide powers of enquiry to fully assess a bankrupt or company’s financial affairs, not only to obtain records and information but also to secure assets and overturning past transactions involving other parties. It’s particularly pertinent in matters where those parties have absconded or are uncooperative, where IPs may obtain crucial information and records regarding undisclosed assets. Further, these powers are only available to IPs and not to individuals or companies suing one another”
Case Law
Recent examples demonstrating the wide reach of liquidators include Mitchell v. Al Jaber (UKSC, 2024) as well as Bilta (UK) Ltd v Tradition Financial Services Ltd (UKSC, 2023) and Stevanovich v. Richardson (JCPC, 2023).Mitchell v. Al Jaber
In Mitchell v. Al Jaber, the joint liquidators brought claims against Sheikh Mohamed Bin Issa Al Jaber, a Saudi-Austrian billionaire, and his son, Mashael, for breach of fiduciary duty and knowing receipt following an improper share transfer. In 2016, Al Jaber posed as a bona fide director of his BVI company, MBI International & Partners Inc – despite its prior dissolution – and transferred away its shares in JJW Hotels & Resorts Holding Inc, which owns and operates a portfolio of hospitality assets in Europe and the Middle East on the sheikh’s behalf. The recipient company, Guernsey-registered JJW Limited, subsequently transferred these shares to another entity within the sheikh’s orbit, MBI Holdings Inc, while JJW Hotels’ assets were also moved elsewhere.Al Jaber argued that these transfers were undertaken as part of a wider corporate restructuring. However, in May 2019, the liquidators initiated a claim with the English High Court aimed at obtaining compensation, alleging misappropriation. In February 2023, Smith J held that Al Jaber’s transfer of shares away from MBI International & Partners Inc was fraudulent, ordering him and JJW Limited to pay EUR 67.1 million in equitable compensation to MBI¹.
Stevanovich v. Richardson (JCPC, 2023)
Another good example is the ongoing dispute in Stevanovich v. Richardson, at the centre of which is a BVI investment fund named Barrington Capital Group Ltd. The main defendant was the sole director of Barrington, whose beneficial owners were his family and associates. Barrington had advanced a series of loans to Petters Company Inc, a US entity that was later found to be part of a Ponzi scheme unrelated to Barrington. Prior to the collapse of the Ponzi scheme, Petters repaid Barrington its loans with interest. In 2010, Barrington was placed in members voluntary liquidation (i.e. it was solvent) and dissolved in January 2011.
However, Barrington’s dissolution was later declared void by the BVI Commercial Court, which also appointed joint liquidators, following an application made by the bankruptcy trustee of Petters Company. Two years later, the Petters trustee secured a default judgment against Barrington for USD 500 million, with the latter’s liquidators admitting a claim of almost USD 400 million in the liquidation.
Barrington liquidators then started proceedings against the main defendant in 2016, seeking damages for breach of fiduciary duties when he was a director of Barrington. In other words, after Barrington’s restoration, liquidators assumed control of the company, admitted a very large creditor claim connected to an alleged fraud abroad, and pursued litigation against Barrington’s former management².
Bilta (UK) Ltd v Tradition Financial Services Ltd (UKSC, 2023)
This case arose from a so called “carousel” VAT fraud involving trading in EU emissions allowances. In 2015, Bilta (UK) Ltd and several other UK companies involved in the scheme entered liquidation. Their joint liquidators subsequently brought claims against a brokerage, Tradition Financial Services Ltd (TFS), claiming that it knowingly participated in fraudulent trading by brokering improper carbon credit transactions.Bilta’s joint liquidators deployed various statutory remedies, such as Section 213 of the Insolvency Act 1986, to bring TFS within the court’s jurisdiction. While several dishonest assistance claims initiated against TFS in the English High Court were time-barred, other claims ultimately succeeded.
Conclusion
These cases showcase how creative use of liquidators’ wide-ranging powers can be used to achieve a recovery. All three cases involved jurisdictions – the US, UK and BVI – which are signatories to the UNCITRAL Model Law on Cross-Border Insolvency – a factor that made it easier for liquidators to overcome jurisdictional challenges. According to Interpath’s King:
“A large number of our engagements involve complex cross-border structures and recognition of the UK insolvency appointment enables those IP powers to be deployed in relevant jurisdictions, such as to obtain records and information and to secure assets.”Ultimately, the liquidators’ role is to act in the interests of creditors, and they are empowered to investigate, recover, and distribute assets accordingly. As such, it is in the interests of litigators and funders alike to leverage these extensive powers to ensure maximum recovery is achieved.
[1] A subsequent appeal by Al Jaber and JJW Limited was partially successful, with the Court of Appeal ruling in May 2024 that no equitable compensation was payable as the shares had become worthless. The liquidators have since appealed this verdict to the United Kingdom Supreme Court, where proceedings appear ongoing.
[2] This dispute is also ongoing, with the main defendant having filed an appeal with the Judicial Committee of the Privy Council
About Deminor
Deminor is a leading independent partner for litigation funding solutions, supporting clients worldwide across complex commercial disputes, investment recovery, anti-trust claims, collective actions and asset recovery matters.
