In 2020, the Covid-19 pandemic made debtor recalcitrance and evasion both easier and more attractive, and the hard times are far from over as we enter 2021. The economic pressures are painfully obvious: The US is on track to reach a 20% budget deficit—something that has never happened in peacetime—and the Bank of England is predicting the worst recession in 300 years. The IMF has estimated that the cumulative output loss of the downturn will amount to $12.5 trillion, roughly the size of China’s economy.
With continued cash constraints and a rise in judgment debtor insolvency on the horizon, creditors will need to get more creative in their enforcement strategy to recover assets from judgment debtors who likely will be even more reluctant to pay.
Debtors are appropriating creditor discovery tools
Over the last year, we have seen an increasing trend towards debtors making use of discovery tools common to creditors in order to delay and frustrate enforcement attempts and achieve a rehearing of previously lost battles. For instance, by scrutinizing director and officer depositions and challenging worldwide freezing orders after the fact—often making unfounded allegations of wrongdoing—debtors are increasingly finding ways to draw out the recovery process to the detriment of creditors.
Debtors are increasingly finding ways to draw out the recovery process to the detriment of creditors.
The pandemic has aided debtor evasion
With Covid-19 creating market uncertainty, debtors tended to prioritize cash conservation over settling judgment debts, choosing to harden and defend their positions, draw out litigation and buy themselves additional time.
Pandemic-related disruptions across global judicial systems have further reinforced this trend. For instance, slowdowns in court proceedings have made it easier to seek a delay. Meanwhile, inconsistencies between how jurisdictions handled court disruptions made coordinating multi-jurisdictional recovery exercises more difficult. The UK adapted well, embracing remote hearings over video conferencing technology with relative speed. But in some offshore and smaller secrecy jurisdictions, doing this was impossible.
What to expect in 2021
Debtors will recant on settlement agreements
Settlement agreements reached in 2020 to buy time for judgment debtors are likely to fall over in 2021, as we expect to see these agreements defaulted on or not honored when economic conditions evolve. If the economy worsens, debtors facing continuing financial problems are unlikely to honor a settlement agreement made in 2020 when the outlook was brighter; if the economy improves, debtors will prefer to invest their money and grow their business rather than paying out millions in judgment debt. Thus, the ability to develop and adapt enforcement strategies will be crucial in the year ahead.
A dramatic rise in insolvencies may well impact judgment creditors' ability to be paid.
As insolvencies rise, creditors will have to hunt for directors and owners and their assets
We have already seen some high-profile insolvencies in 2020 and economists predict we should expect many more in coming months as government and central bank stimuli abate. Since the 2008 financial crisis, corporates have been adding debt to their balance sheet and Bloomberg reports that there was nearly $1 trillion of distressed debt in the US as of March 2020. With the US high-yield market over six times leveraged today, a rise in corporate insolvencies is inevitable. A dramatic rise in insolvencies may well impact judgment creditors’ ability to be paid.
When seeking assets from an insolvent company, creditors and insolvency professionals may need to investigate those tied to the company’s directors and officers—particularly if there is an element of fraud. But because bad actors may make efforts to hide their interests or structure their wealth in a way that is not obvious and transparent, hunting down and acquiring the assets of executives and non-executives of an insolvent company is not at all a straightforward process and often requires specialized expertise in order to make progress.
Where the professional directors of a company benefit from indemnity clauses in their company’s memorandum articles or service contracts, creditors may have to look further afield and be more creative to find recoverable assets. For instance, they may have to look beyond the executive functions for de facto or shadow directors with deep pockets, which may include shareholders, beneficial owners of the company or sometimes an executive manager or asset manager.
As the number of insolvencies inevitably rises in the year ahead, judgment creditors will increasingly seek specialized expertise in asset tracing, intelligence gathering and enforcement techniques to help guarantee they can build a successful recovery strategy.
Recalcitrant debtors will become more creative in evading transparency measures
We recently have seen an increased push for transparency on beneficial ownership in several jurisdictions. Earlier this year, the government of the British Virgin Islands (BVI) committed to making beneficial company ownership publicly accessible information.
If this measure moves forward, creditors should not be fooled into thinking special purpose vehicle secrecy is going to disappear—debtors will simply find other ways to hide the ultimate beneficial owners of these companies. If the BVI becomes more transparent, we expect to see an increase in activity in the Cook Islands, Nevis and other offshore jurisdictions where it will be even harder to enforce and easier to hide interests. Professional advice will be key to navigating the new jurisdictions and structures put in place to circumvent new transparency regimes.
Claimants increasingly will seek funded asset recovery
Pursuing enforcement strategies will become longer, riskier and more expensive in the coming months—an unappealing prospect for creditors that have already been burned twice: Firstly by the initial harm and secondly by the failure by the judgment debtor to pay the award or settlement. As debtors increasingly delay payment in the current economic climate, asset recovery will require significant access to capital alongside substantial experience and expertise.
Working with a legal finance provider, such as Burford, with its own integrated in-house corporate intelligence and asset recovery business provides an all-in-one solution for clients. Combining capital and investment expertise with top-level global judgment enforcement allows creditors to recover judgment debts while also relieving the associated financial burden and risk.
While the impact of the pandemic is already being felt by judgment creditors, the fallout is far from over. An increase in insolvencies, the unveiling of large-scale corporate fraud and increasingly creative evasion and delay tactics from judgment debtors all mean that navigating the changing global enforcement landscape will become ever-more complex. As a result, we anticipate that demand for corporate intelligence and asset recovery services will continue to grow as clients need to trace assets, prove legal and beneficial ownership, investigate fraud and distinguish strategically important assets.