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Roundtable: Insolvency experts review trends in offshore jurisdictions

  • Connor Murphy, Elizabeth Fisher
Read Connor Murphy's Profile
Connor Murphy

Connor Murphy

Director

Former Managing Director, BDO Advisory USA

Read Elizabeth Fisher's Profile
Elizabeth Fisher

Elizabeth Fisher

Senior Vice President

Former VP, EMEA Head of Banking & Regulatory, Axiom

In August 2020, Burford Senior Vice President Elizabeth Fisher and Director Connor Murphy directed questions concerning key bankruptcy trends to a respected group of experts in offshore jurisdictions. Their perspectives are excerpted and gathered below.

The economic impact caused by COVID-19 (which also led in part to the collapse of oil prices) has put companies under considerable economic stress. What types of restructuring or corporate distress situations resulting from this public health crisis and the shutdown of economic activity have you seen recently?

Ulrich Payne: The global impact of COVID-19 has been devastating and caused immeasurable economic challenges for both businesses and individuals.

The most obvious and immediate effect in offshore jurisdictions such as the Cayman Islands has been the complete halt to all domestic tourism and tourism-related activity, which has had an enormous impact upon the economy and resulted in many businesses—including those indirectly linked with tourism—seeking debt relief or closing their doors permanently. In that regard, the responses of the Cayman and British Virgin Islands (BVI) governments and banks have been encouraging, with governments implementing financially backed support plans and indicating relief policies, and with a number of banks in the BVI introducing assistance schemes such as repayment deferrals.

Internationally, we are seeing an increase in offshore-registered funds triggering their gating provisions, as well as companies urgently seeking insolvency regime protections to give themselves breathing room while they tackle unexpected financial challenges caused either directly by the impact of COVID-19 or indirectly through the uncovering of fraudulent (or similar) activity.

Matthew Richardson: In the BVI I don’t believe that the impact has been felt at any material level yet, in terms of formal appointments. While lawyers are seeing increased workflows, this hasn’t yet resulted in increased insolvencies and restructurings in BVI. However, we expect this to change significantly during the latter part of the year and we expect to see an increasing volume of restructuring-based work.

Because BVI is an offshore jurisdiction, BVI companies are one step removed from the main street businesses now feeling the brunt of the COVID-19 downturn. The measures put in place by governments to support businesses impacted by COVID-19 also mean that we won’t see the increase of insolvencies for a number of months.

BVI companies are often found in large corporate groups and the BVI has proved itself to be at the forefront of global restructuring by the use of “light touch” provisional liquidations. This important tool provides protection for the company from creditors (especially predatory creditors who may wish to commence actions in other jurisdictions to improve their position), and enables the provisional liquidators to oversee and monitor the operations of the company whilst the wider group restructuring progresses. The BVI is therefore well positioned when the inevitable slew of restructurings and insolvencies occurs.

It’s worth mentioning that we anticipate an increase in fraud and shareholder dispute work as the crisis progresses. An upset in the market always leads to an increase in the uncovering of fraud, and the lack of available funding can cause shareholder relations in joint venture arrangements to crumble.

Ian Lambert: The types of restructuring and corporate distress situations that I have seen recently that have resulted from the economic impact caused by COVID-19 and the shutdown/slowdown of economic activity include local/Cayman operated businesses such as restaurants, hotels, retail shops as well as businesses directly connected to the Cayman tourism industry such as tour companies, dive companies and rental car companies.

Due to the current economic challenges for businesses I anticipate that there will be a significant amount of insolvencies going through the system starting in the end of 2020.  Businesses and people are going to get desperate and commit midstream frauds which means that they were running a legitimate business and as money is not plentiful anymore, they resort to a fraud to remain in business. These types of matters will take time to be uncovered and work through the system.  Other businesses will simply run out of money to pay their creditors and fall into an insolvent position. 

What challenges are pandemic-related restrictions on travel and meetings posing to your current matters and to the market at large?

Ian Lambert: Restrictions on travel and meetings over the last few months have made in person interactions with existing clients and prospective clients almost impossible. With that being said, as time goes on, people in the legal industry and corporate world are adapting quickly to the “new normal” and are using various technologies to conduct meetings and even court hearings through videoconferencing. Initially, there were various growing pains, but most of the people that I come in contact with have embraced the fact that business will need to be run differently, and the matters I am working on are running quite smoothly. Given Cayman’s exemplary control on COVID-19, government restrictions have now lifted, which allows us to meet clients face-to-face.

Ulrich Payne: The ability to travel for those based in the Cayman Islands and BVI was effectively ended when the respective governments closed their airports to all commercial flights. Similarly, offices, public spaces and government facilities were all closed.

Fortunately, the Cayman and BVI courts adapted well, with hearings being conducted via videoconference (something that the Cayman courts were already well-practiced at doing). In Cayman, the courts also implemented a highly effective e-filing system, which continues to be used as the courts reopen. This greatly reduced the potential impact of COVID-19 on the ability to effectively litigate ongoing and new proceedings.

As with the rest of the world, meetings have been conducted through videoconferencing apps, and, when combined with the ability to share screens, this means it is still possible to conduct meetings effectively. Of course, that’s not to say that I am advocating that we should do away with in-person meetings!

Matthew Richardson: The majority of the work we undertake is cross-border in nature and our days often involve liaising with many parties in numerous jurisdictions. Therefore, as a rule, a lot of our work is done from our desks in the BVI, so from that perspective the great news is that the lack of travel hasn’t adversely impacted our ability to manage and progress our matters.

Of course, there are certain matters, key meetings and settlement discussions that are better carried out in person, but as with the rest of the world we’re having to adapt and hold these via virtual mediums.

The biggest impact for us is our inability to attend non-client events in person, such as conferences, which are obviously a great opportunity for us to maintain existing relationships and make new ones. But again, we’ve embraced the “new normal” and taken advantage of virtual team gatherings and presentations.

Are courts and practitioners better prepared to deal with large complex insolvencies after the 2008 global financial crisis? What do you predict will be the major challenges to overcome when the inevitable slew of insolvency litigation hits? 

Matthew Richardson: From a BVI perspective, the answer to the first question is yes, definitely.

The 2008 financial crisis put the BVI on the map as a leading dispute resolution jurisdiction. There were so many novel and complex matters arising at that time and the BVI was—and has continued since then to be—heavily involved in and at the cutting edge of many of these matters.

In my view, the crisis caused a significant increase in the quality (and quantity) of the professionals in BVI as we all had to react to increasing complexity and volume of matters and the increasing demands from the creditors and/or clients.

Since then, the BVI has continued to build on this and has cemented its reputation as a go-to jurisdiction for large and complex insolvency matters.

The key challenge for practitioners in the BVI in the short to medium term will be staffing. Specifically, if we need additional staff to deal with an increase in work, it will be difficult for us to get people on the ground here in BVI due to travel restrictions as a result of COVID-19. Practitioners will need to find ways to deal with this until the restrictions are eased. As a global business, we’re well versed in working with colleagues from our other offices, and therefore we don’t envisage this will cause us any material issues.

Ulrich Payne: Undoubtedly, the offshore legal systems—and those who work within them—are better prepared to deal with these types of cases, both through the benefit of experience and by design. For example, in the Cayman Islands, the Financial Services Division of the Grand Court (the FSD) was created in 2009 in recognition of the need for special procedures and skills for dealing with the more complex cases that arise out of the financial sector in the Cayman Islands, including complex insolvencies. Furthermore, the Cayman Islands remains a highly attractive restructuring jurisdiction, with considerable experience in efficiently dealing with very large complex restructurings, as shown in the way it handled the Ocean Rig restructuring.

That said, we will undoubtedly still need to overcome the age-old issues of resources (court time, sufficient law firms to service all of the matters without conflict, etc.) and complexity. Those who wish to profit unfairly will never tire of finding new and ever more complex ways to try to evade or avoid the law and its enforcement.

Ian Lambert: The experience gained from large, complex multijurisdictional insolvencies flowing from the 2008 global financial crisis has prepared the Cayman courts and Cayman practitioners for the influx of insolvency litigation that will flow out of the COVID-19 pandemic. We anticipate that the legal and logistical issues in the current financial crisis will be similar to those that resulted from the 2008 global financial crisis. The courts and practitioners will undoubtedly face an increased volume of insolvency litigation cases. In some jurisdictions the courts are already at or close to maximum capacity, and adding more cases or more complex cases will put a strain on those court systems.

The use of legal finance by insolvency practitioners is growing in many offshore jurisdictions. How effective has legal finance been as a tool for maximizing recoveries for insolvency estates with offshore claims?

Ian Lambert: The key benefit to the use of legal finance by insolvency practitioners—and other parties involved in litigation—is its ability to provide access to justice. Without legal finance there would be many legal entities that would not be able to exercise their legal rights The maturity of the litigation funding industry combined with the Covid-19 issues is going to increase the number of just claims being made by victims.

Ulrich Payne: We are certainly seeing an increased willingness on the part of clients and the courts to consider the use of legal finance, particularly within insolvency. It is undeniable that funding creates the ability to litigate against parties with deep pockets who might otherwise be in a position to aggressively defend claims so as to price out the typically cash constricted liquidation estate from pursuing its claims. Fortunately, two decisions in 2017 and 2018 by the Grand Court of the Cayman Islands approved third-party commercial litigation funding agreements, paving the way for the Grand Court’s first public judgment in December 2018 approving a liquidator’s application for permission to enter into a third-party litigation funding agreement with a commercial funder (In re Platinum Partners Value Arbitrage Fund L.P.)

Matthew Richardson: From a BVI insolvency practitioners’ perspective, litigation funding has not been widely employed yet in BVI insolvencies. It’s certainly not as prevalent as it is for example in England or the Cayman Islands.

I think this is in large part a result of the circumstances and structures in which BVI companies are used and, therefore, the nature of the insolvency appointments in the BVI vs. other jurisdictions.

BVI companies are often used as holding companies in finance transactions or as special purpose vehicles between two shareholders for a specific project or as entities to hold a family’s wealth.

Therefore, when insolvencies or other enforcement actions arise we often find the aggrieved creditor or shareholder has sufficient financial means to fund the process and so external funding isn’t needed.

However in circumstances where funding is needed, most funders want to see a detailed strategy with legal analysis on the possible causes of action and a detailed understanding of the assets of the litigation targets in order to consider the provision of funding. To provide this level of information and clarity often requires a significant time and cost. If there’s no funding available in the estate or from creditors, then it can be difficult to secure funding.

Grant Thornton is well-known for acting in circumstances like this. Working with likeminded professionals, we often will incur time and in some instances advance funds to the estates to enable these initial steps to be taken to maximize the chance of funding being obtained. Additionally, we’re aware that funders are becoming more attuned to the situations we often face in BVI and so are more willing to advance a small amount of “seed” capital to insolvency practitioners to allow these initial assessments to be undertaken.

The growing availability of litigation finance is extremely beneficial to creditors and insolvency practitioners as it can allow recoveries to be made which historically could not have been made. We welcome the continued development of this market.

There is remarkably little caselaw on legal finance in the BVI. How do you think the caselaw may develop in coming years as offshore insolvency courts face a rise in demand for insolvency litigation?

Matthew Richardson: As you say there is very limited caselaw on litigation funding in insolvencies in the BVI. We’re only aware of a couple instances where the BVI Court has been involved in approving the use of litigation funding in an insolvency.

From our perspective the key developments we’d expect and like to see would be to simply see more applications being made to the court by insolvency practitioners to deploy litigation funding. Practitioners would benefit from obtaining greater clarity from the court on areas including whether the court expects to be involved in the process or whether the court will leave this to the commercial discretion of the office holder; what rates of return the court deems appropriate; the extent to which the office holder needs to test the market; and to what extent the views of the creditors need to be sought.

Having said that, I recently made a successful application to the BVI Court to approve the funding of a liquidation. The BVI Court provided some helpful guidance on this application. It wanted to see evidence that the terms advanced were in line with market norms and that the creditors were supportive of the finance being taken.

Our view is that the BVI Court will generally be supportive of litigation funding to insolvencies, so long as the office holder can demonstrate it’s in the best interests of the creditors, that no alternative funding is available from the creditors, the terms are appropriate to the situation and that the funding represents the best option to achieve a recovery for creditors.

Ulrich Payne: Litigation funding in the BVI remains underdeveloped. The BVI court system was governed by the Eastern Caribbean Supreme Court Act (ECSA) but has recently been supplemented by the Legal Profession Act 2015 (LPA). ECSA Section 11 provides that the court will look to current practice in the High Court in England when there are gaps or lacunas in the laws or procedure in the BVI. As a result, in the absence of a clear rule, the BVI’s attitudes toward litigation funding are influenced by English practice. While most litigation remains privately funded, there are a handful of cases in which third-party funding has been acknowledged by the BVI Court. A 2011 decision made in the BVI Court is helpful in suggesting that it has accepted third-party funding as permissible (although it should be noted that the judgment does not seek to decide the point).

Ian Lambert: Personally, I am not very close to the development of litigation funding case law in the BVI. What I do know is that the court, the practitioners and the parties need to have the right cases and motivation to lay the groundwork for the development of litigation funding case law in a particular jurisdiction. Generally speaking, the overall trend is that stakeholders, insolvency practitioners and the courts see legal finance as an important tool for insolvency litigation. Clearly, litigation finance is a growing area and it will continue to grow in the future.

If it is passed into law, how do you foresee the Private Funding of Legal Services Bill proposed by the Cayman Island’s Law Reform Commission (LRC) changing the role of legal finance in the Cayman Islands?

Ian Lambert: Progress with the Private Funding of Legal Services Bill has been slow. Legal finance of Cayman Islands litigation brought by Cayman Islands companies in official liquidation is a common occurrence. The Cayman Courts have permitted such third-party litigation funding as liquidators of Cayman Islands companies have a statutory power to sell the fruits of an action to a litigation funder. These litigation funding arrangements require the approval of the Grand Court and are subject to various restrictions now clearly set out in Cayman Islands caselaw. At this time, the process of obtaining legal finance for Cayman Islands litigation brought by Cayman Islands companies in official liquidation is quite smooth.

I am concerned that the Private Funding of Legal Services Bill, if enacted, may impose restrictions on Cayman liquidators that may make it more difficult to obtain litigation funding on their cases. On the other hand, the Private Funding of Legal Services Bill, if enacted, would assist other litigants in obtaining funding for their litigation and as a result provide those people with access to justice where otherwise their cases would be stifled.

Ulrich Payne: In the Cayman Islands, third-party litigation funding is already common and has been judicially endorsed in certain circumstances only, outside of which it is presently void for illegality on the grounds of maintenance and champerty.

If passed, the Private Funding of Legal Services Bill of 2015 would represent a potentially significant change to litigation funding in the Cayman Islands, paving the way for attorneys to enter into contingency fee agreements with commercial clients and expressly recognizing that funding by third parties be permitted in a far wider range of proceedings. As such, it is hoped that the bill would mark not only a substantial improvement to the options available to litigants but also to the fundamental right of access to justice.

Download 2020 Burford Quarterly, Issue 4

 

Matthew Richardson is a Director at Grant Thornton BVI. Previously, he established the office of a global firm specializing in contentious insolvency and asset recovery. He has over 20 years’ experience in insolvency and has spent 12 years living and working in the BVI. He has extensive experience in corporate recovery, primarily in contentious cross-border insolvency and fraud involving international litigation, asset tracing and realization of complex and illiquid assets.

Ian Lambert is the Head of Litigation, Restructuring and Insolvency at HSM. He has more than 15 years of experience in major, complex litigation cases, with significant concentration in insolvency litigation, asset recovery, fraud litigation, trust litigation, commercial litigation and contract disputes.

Ulrich Payne is a practicing lawyer at Kobre & Kim based in the Cayman Islands. He represents clients in high value multijurisdictional disputes involving insolvency, restructuring, financial products and services, private equity and contentious boardroom and shareholder issues. He has achieved legal directory rankings including a 2019 Chambers Global ranking in Dispute Resolution, Restructuring & Insolvency.