Once sophisticated debtors decide not to honor a debt, it is relatively easy for them to structure their affairs to place their assets beyond the reach of creditors. As a result, creditors often struggle to gain access to the basic information necessary to pursue assets held in offshore or other debtor-friendly jurisdictions, let alone successfully enforce judgments.
Creditors are thus faced with the unpleasant choice of either writing off the debt in its entirety, or expending further capital, time and energy in pursuit of the debt without any guarantee of success. In this situation, the strategic use of jurisdictional arbitrage can be vital to defeating complex asset protection schemes.
Burford’s asset recovery team includes experts in implementing jurisdictional arbitrage as part of a larger enforcement strategy, who have recovered hundreds of millions in lost value for companies around the world.
What is jurisdictional arbitrage?
Jurisdictional arbitrage is the strategic use of simultaneous proceedings in multiple jurisdictions to gain access to data, restrain assets and ultimately drive successful recoveries. By taking such an oblique approach, creditors can leverage the respective strengths of different judicial systems while mitigating against their weaknesses.
Broadly, jurisdictional arbitrage is divided into three parts:
- “Offshore” discovery: Seek discovery in a favorable jurisdiction to secure crucial data regarding a debtor’s assets sitting offshore or in traditional secrecy jurisdictions
- Leveraging data: Use data secured from one jurisdiction with a more favorable discovery regime to obtain data in jurisdictions with narrower disclosure mechanisms
- Securing identified assets: Secure assets in offshore/secrecy jurisdictions using civil attachment tools based on information derived from onshore discovery
What are the advantages and disadvantages of judicial arbitrage across jurisdictions?
|
Jurisdiction |
Strengths |
Weaknesses |
|
US |
- Ability to "fish" for information and obtain disclosure from third parties at minimal cost |
- Rigorous test to secure pre-action attachment or restraint of assets -Overall higher cost of litigation |
|
Common Law |
- Effective worldwide freezing orders and other ex parte relief - Established disclosure mechanisms |
- More constrained disclosure mechanisms (no "fishing") than in the US at greater expense - Cost shifting exposes creditors to potential downside risk |
|
Civil Code |
- Straightforward to attach and restrain assets in the name of debtors - Lower cost of litigation |
- Lack of effective discovery mechanisms, especially in relation to third parties - High hurdle to establish alter ego or pierce the corporate veil |
How does jurisdictional arbitrage work in practice?
Having established the debtors’ footprints, including their physical location and the relevant onshore/offshore jurisdictions where they hold assets or maintain banking relationships, Burford’s asset recovery team coordinates with local counsel to determine the toolbox of available enforcement tools.
Based on the advice of local counsel and intelligence obtained through discovery in more favorable jurisdictions, a multi-jurisdictional plan is established to secure further data and preserve assets.
Questions to consider when tracing assets
Can you secure the pre-action restraint of assets? Can creditors obtain disclosure from third parties? Are there sanctions for the failure to comply with court orders?
Case study
Problem: Judgment debtor was an offshore shell company with no direct links to the individual thought to be its beneficial owner. While the creditor had information that the debtor entity had received a multi-million-dollar sum from a third party, where the funds had ultimately been deposited was unknown.
Solution: Evidence gathered via subpoena from US correspondent banks identified significant debtor funds passing through a European bank account in a jurisdiction with limited discovery options. Using this evidence and other information generated by Burford’s investigation, a successful application was made in Dubai against the European bank’s local branch for production of account information.
Impact: As a result, disclosure made by the bank included “know your customer” data identifying the debtor as the beneficial owner of the judgment debtor and heretofore unknown other offshore entities in the Caribbean, as well as various named bank accounts in continental Europe.
How is legal finance used alongside jurisdictional arbitrage?
Pursuing simultaneous proceedings across multiple jurisdictions is almost always necessary to defeat complex asset protection schemes implemented by recalcitrant debtors, often at significant cost to the creditor. Creditors are therefore often at a disadvantage when it comes to litigating against recalcitrant debtors.
Together, legal finance and jurisdictional arbitrage can help level the playing field. Legal finance allows creditors to de-risk this cost, while Burford’s asset recovery team helps clients leverage the financial benefits of litigation finance to craft multi-jurisdictional strategies to effectively pursue outstanding debts.
Burford is the only major legal finance provider with its own in-house global corporate intelligence and asset recovery business, giving our clients the benefit of our combined capital and investment expertise and top-level global judgment enforcement.
A guide to using asset tracing is available in Burford’s Asset Recovery 101.
This article was originally published on Burford’s website on July 7, 2020 and was updated on October 26, 2022.