Once he has control of an entity and the investigations into what went wrong are underway, a liquidator
and his advisors turn their attention to
determining their litigation strategy.
When a financial collapse occurs, there
are often wrongdoers, if not fraudsters,
and the liquidator must determine the
best way to recover assets or generate
recoveries through litigation.
With the benefit of legal advice,
a liquidator must first determine,
“Can I sue?” and if so, move on to
the next question, “Where do I sue?”
Among the factors to consider are:
• The potential recoveries from
litigation. Do the defendants have
assets, and are the assets realizable?
• Should the proceedings be
commenced offshore or onshore?
• What likely defenses will be raised?
• How will the litigation be paid
for? A liquidation costs money,
and assets with ready cash
value are often not available, not
ascertainable, or nonexistent.
A liquidator must always keep in mind
that any contemplated steps are likely
to require permission of the court in the
jurisdiction governing his appointment.
The court also will want to know the
reasons for the liquidator’s decisions.
There can be no doubt of the
emergence in recent years of the
offshore liquidator in the onshore
market, particularly in the United
States. If there is one thing for which
offshore bankruptcy practitioners
can be grateful, it is the incremental
increase in awareness over the past
five years of onshore practitioners
of the offshore model and its related
jurisdictions, particularly the Cayman
Islands and British Virgin Islands (BVI).
One of a liquidator’s primary objectives
is to achieve meaningful recoveries
for an estate for the benefit of its
creditors and, in an ideal world, its
shareholders, too. A liquidator considers
where he may have the best chance
of achieving a successful recovery
in this regard. But first, the liquidator
must determine that there are assets
and that they can be recovered.
It may be pointless, for example, for
a BVI liquidator to sue in BVI if, in
fact, there are no recoverable assets
in that jurisdiction. It also may be
pointless to commence an action
against an entity that is in liquidation
and has little prospect of meeting its
obligation to creditors or, worse still,
when there are competing creditors
and priorities in the target estate. As
such, the litigation strategy should
take into account where the assets of
the company might be and the tactics
available in that jurisdiction that may
provide for an effective recovery.
Various factors may influence a
liquidator’s choice of jurisdiction in
which to pursue litigation, should
options be open to him. As a starting
point, the liquidator looks to the
contracts and arrangements that govern
the legal relationships. The usual conflict
of law principles apply to establishing
jurisdiction to bring common law
claims, but sometimes specific statutory
provisions for matters such as clawback
claims can confer jurisdiction.
From a liquidator’s perspective,
consideration of where to bring a
matter, particularly in the U.S., takes into
account the nature of the jurisdiction
and the court’s conduct in similar
matters. This applies as much to
where within the U.S. to bring a claim
as to the federal jurisdiction itself.
For example, a liquidator often considers
bringing causes of action against former
service providers, to which a common
defense, such as in pari delicto, may be
raised. Because New York courts have
historically upheld such defenses, a
liquidator may consider bringing the
claim in another jurisdiction, such
as Canada, Cayman, BVI, the U.K., or
even in another U.S. federal circuit
where it is less likely that the company
will need to overcome this hurdle.
When a liquidator is appointed in any
jurisdiction, establishing a cash flow for
the work to be done is second in priority
only to the emergency steps taken to
secure the assets. It is relatively easy
to predict cost liability for bringing an
action as liquidator to recover assets or
obtain damages in the U.S. legal system,
because as a general rule everyone
pays his own way. In BVI, Cayman, and
most other English-based common law
jurisdictions, however, the general rule in
contentious matters is that the loser pays.
Thus, possible double exposure for
an unsuccessful action may prove
unpalatable for many officials when
there is an option to take action in the
U.S. under a risk-related fee structure.
This is especially true when the
liquidator is potentially on the hook
personally for such cost exposure,
even if there is an indemnity against
the company’s assets or a funding
arrangement in place. Without the
security of a retainer sum on account,
there is always a risk of exposure.
There is a dearth of case law in England
and offshore on the question of whether
a petitioning and funding creditor can
be held liable for losses to the company
or the liquidators arising directly from
setting aside the appointment of the
liquidator on appeal. The BVI Court
of Appeal did rule, however, that
when an appointment of a liquidator
has been set aside, the petitioning
creditor could be made liable for
the costs and fees of the liquidator
being in office during the period of
the misconceived appointment.
Given the statutory lien a liquidator has
over a company’s assets, that is a second
layer of protection for the liquidator in
the event the company has no assets. 1
More recently, however, 2 the English
Court of Appeal has seemingly relaxed
the rather rigid approach pursuant
to which a bankrupt company in
liquidation always paid for the trustee’s
fees in favor of a more fault-based
approach that protects the innocent
victim, which is the entity over whose
assets the liquidator has a lien.
Thus, suing professional service
providers in the Caribbean could
prove an expensive proposition, as
a professional negligence suit could
run into the tens of millions of dollars.