Fraud and insolvency can be vexing. However, there are a number of tools available to an insolvency professional who is faced with an insolvent estate that has been made the victim of grand malfeasance or fraud. In the context of such an insolvency, the discovery and preservation of concealed assets linked to an estate is the focal point of the entire process. In general terms a Liquidator (or other insolvency officeholder) is vested with broad powers that can be exercised towards the achievement of that objective. The focus of this paper is on the use of certain extraordinary ex-parte measures to locate the fructus sceleris (the fruits of fraud) optimally. The concealed asset discovery remedies described in this paper are available in most British Commonwealth jurisdictions and in some jurisdictions in the United States.
This paper considers ex-parte relief in the context of the appointment of a provisional Liquidator, and also assumes that the insolvency in question is one that involves a number of jurisdictions. This article emphasizes the use of 'gagging' and 'sealing' relief1 in support of multi-jurisdictional asset location investigations. While some reference to Norwich Pharmacal/Bankers Trust document discovery and asset Freezing Orders must of necessity be included, an in depth discussion of such reliefs2 is beyond the scope of this article. 'Following' or 'tracing' misappropriated value down multiple paths of transactions or transfers, cannot usually be accomplished effectively in the absence of the protection of utmost secrecy surrounding the investigation. Sealing and gagging orders are, in effect, judicially imposed secrecy orders. They require the Court's staff to prohibit public access to the Court's record of the proceeding involved. This is the "Sealing Order." A gag on the other hand is an injunction imposed on any person with knowledge of either 'sealed' proceedings generally or, sometimes more specifically, an order compelling the disclosure of confidential documents, from tipping-off any third party of the same. It is thus sometimes also referred to as an 'anti-tip-off Order.'
The starting point in any analysis of the means available to a Liquidator to achieve the objectives of the appointment is the Order appointing the Liquidator. Thus the drafting of the initial Order appointing the Liquidator is of paramount importance. Thoughtful drafting can ensure that the Order can encompass a broad scope of powers or entitlements that may not have originally been contemplated. However, caution is also appropriate at this time, given that in the multi-jurisdictional context the foreign officeholder will of necessity require recognition in a foreign jurisdiction before he can hope to exercise any powers there. As the reader will no doubt be aware-recognition by a foreign Court is predicated upon acceptance of the powers bestowed in the initial appointing document.3
It is a general principle of the English common law that the dissolution or liquidation of a company by an order of a court located in its place of incorporation will be recognised by an English Court.4 This general rule of the common law is subject to the proviso that the appointment of the Liquidator in question is not contrary to English public policy, and in particular that such has not been procured by fraud. This traditional principle is also now the subject of significant change through the relatively recent introduction of the concept of a company's 'centre of main interests' – or its C.O.M.I. – both within the EU and in jurisdictions which have adopted the UNCITRAL Model Law on Cross-Border Insolvency (1997). In addition, where the Order appointing a Liquidator contains provisions enabling him to act in ways that would be considered outside the scope of a Liquidator's powers in a foreign jurisdiction, the foreign Court is unlikely to recognise the appointment absent appropriate concessions or acknowledgements.
Given the focus of this paper one of the most important considerations in seeking the assistance of a foreign Court, is whether the jurisdiction of that Court facilitates Liquidators by making available ex-parte procedures designed to uncover information under the protection of ancillary secrecy orders – such as sealing or gagging injunctions. If the actual insolvency code or body of legislation involved does not specifically provide for the use of ex-parte investigative procedures by a Liquidator or other such official, recourse may – in most in Anglo American jurisdictions – be had to the rules of civil procedure. Most common law Courts have jurisdiction to hear a variety of applications without notice, and in general one can appeal to the inherent jurisdiction of a Court to do as it sees fit to ensure that the ends of justice are met. In general it may be said that the common law jurisdictions, including, for instance, the United States, England & Wales and Australia, provide for broad reliefs in such context.5 In contrast, civil law jurisdictions in general do not countenance such relief. However, in the intellectual property context, E.U. Directive 2004/48/EC is to change that stance. Under this Directive, the basic principles of the Norwich Pharmacal/Bankers Trust document disclosure jurisdiction6 are ostensibly to be implemented into the national law of the member states of the European Union regardless of whether they belong to the Anglo-Saxon or the Civil Law legal traditions. The Directive has been widely criticized given its introduction of hitherto common law centric draconian measures. This is arguably one of the reasons that its implementation throughout the EU is well beyond schedule. As of January 1, 2008 the Directive will be implemented in German law such that the third party, Norwich Pharmacal/Bankers Trust document disclosure jurisdiction in respect of intellectual property matters is now afforded recognition in Germany. However, there is no provision made for ancillary sealing and gagging relief. It remains to be seen how this Directive will be implemented in practice in the various EU jurisdictions.7 The fact that such a Directive has been issued however must at least be viewed as a step towards recognition of the utility of such procedures in locating and preserving property or valuable information, albeit in this case intellectual property.
Most common law jurisdictions specifically provide that certain proceedings may be held in camera. However, where that power is not specifically provided for, the Court's inherent jurisdiction can always be appealed to. In effect a Court has power to hear any matter or proceeding (or any part thereof) in camera if it is satisfied that it is expedient, in the interests of justice, or for other good and sufficient reason to do so. Such reasons might include for example, the need to undertake measures intended to combat fraud, uphold public security, or indeed simply to protect confidential or proprietary information. Secrecy orders are often used in the context of trade secrets litigation, by way of illustration. They are also frequently used in litigation involving minors and the family.
In addition, the Court's inherent jurisdiction can also be appealed to in the context of seeking sealing and gagging relief. Again this derives from the Court's inherent power to make any Order necessary to enable it to act effectively. Support for this contention can be found in the case of R v. Connolly  AC 1254, where the Court said:-
"There can be no doubt that a Court which is endowed with a particular jurisdiction has powers which are necessary to enable it to act effectively within such a jurisdiction. I would regard them as powers which are inherent in its jurisdiction. A Court must enjoy such powers in order to enforce its rules of practice and to suppress any abuses of its process and to defeat any attempted thwarting of its process."8
This general principle applies even in respect of matters specifically regulated by statute or rules of Court, so long as the Order does not contravene the statute or rules in question. For example, section 7(1) of the U.K. Civil Evidence Act 1997 does not expressly confer on the High Court jurisdiction to make a gagging order. Nevertheless the power to do so is part of and thus inherent in the jurisdiction conferred on the Court by section 7(1),9 simply because the purpose of the Order is to preserve evidence or property that might otherwise be destroyed, disposed of or hidden. It is seen as a procedural mechanism in achieving the statutory purpose.
Gagging Orders frequently accompany pre-emptive search (or Anton Piller) orders, information (or Norwich Pharmacal/Bankers Trust) orders,10 and asset freezing (or Mareva) injunctions. Their purpose is threefold – firstly, as alluded to above, to prevent a discovery target from tipping off the underlying obligor or malefactor; secondly to protect the alleged underlying wrongdoers from further reputational damage if it became known they had become the subject to a search order; and finally to uphold public confidence in the fair administration of justice. In jurisdictions in which the rules of civil procedure make specific reference to an overriding objective – (generally speaking – that of achieving the ends of justice) – the Court's jurisdiction to grant such orders can be placed squarely within its duty to give effect to the overriding objective.11
In seeking the Court's indulgence in hearing a matter ex-parte or 'in camera,' or a Court Order sealing the Court's file or gagging certain information defendants12 for a specified period, a Liquidator is effectively asking the Court to impose the protection of secrecy over an asset tracing inquiry. In the absence of such protection, the purpose of the legislation enabling the Court to act to help a party to obtain an effective remedy, would be frustrated. In tracing the proceeds of fraud, the intrinsic value of the investigation (as represented by information regarding the chain of value that is the subject of the trace), is at peril of being destroyed if the apparent malefactor learns of the extent or depth of it.
The ability of the Court to impose ancillary secrecy orders to help to ensure that its primary insolvency orders will not be rendered ineffective, must nonetheless be balanced against countervailing interests. Pursuant to its duty to give effect to the overriding objective to do justice, an English Court will only make sealing and gagging orders if it just and proportionate to do so. Gag orders are in effect a restriction on the freedoms of speech and expression.13 An order sealing a Court's file or providing that certain matters be heard in camera is directly in opposition to the general rule that justice be administered in public. All ex-parte proceedings involve the suspension of the rights of a respondent to due process and to make full answer and defence. Restrictions on these basic rights and principles of natural justice must be adequately justified. All relevant countervailing considerations must be weighed carefully. Also the restrictions against disclosure inherent in secrecy orders must themselves be subject to restriction so that they can be said to be the minimum necessary to manage the risk that they are intended to address. A not infrequently imposed restriction on sealing and gagging relief concerns the duration of the effect of such orders. Oftentimes, Courts will impose a fixed period of time on the life of secrecy orders. This can range between a term of one week and six months, in the author's experience. These fixed time limits on the effect of secrecy orders can ordinarily be extended for good cause. Furthermore, if a Court takes the view that a secrecy order is unlikely to realistically address the problem in question (– so for example if information in respect of which a seal or gag order is requested is likely to reach the principal target of an investigation in some other way), then it will not make such an order.
The utility of and manner in which such extraordinary ex-parte relief can be utilised, is perhaps best illustrated by way of example. For the purposes of the present article it is proposed to concentrate on one case study – an insolvency proceeding initiated in a common law jurisdiction in Canada and involving seven other jurisdictions.14 The facts of that case can be briefly summarised as follows. A multinational business was discovered to have thousands of putative creditors in the United States, having operated its business from the Caribbean and from Canada. The enterprise turned over in excess of US$250 million. The proceeds of the business were cleverly concealed by, for example, buying property in a number of jurisdictions, in the names of various nominees and using an elaborate scheme designed to obscure the identity of the ultimate obligor and beneficial owner. Acting on the instructions of a number of creditors, the writer instituted the process of petitioning the enterprise into bankruptcy in the jurisdiction with which it had the closest connection or contacts – in Canada. This process was achieved however by way of the appointment of a provisional Liquidator. The application was made ex-parte. The Order of appointment was granted on the basis that the provisional Liquidator would have a specific period within which to carry out investigations and enquiries under seal and with a view to locating assets and ultimately preserving them. The investigations were completed under a cloak of judicially imposed secrecy during the period of time permitted. Thus, the Court sanctioned not only the ex-parte appointment of a provisional Liquidator, but the maintenance of a seal over the proceedings for a defined period to enable the Liquidator to act more effectively. Evidence was shown that it was highly likely that if the ultimate obligor came to know of these proceedings, evasive action would likely be taken to further transfer assets of the obligor, so as to frustrate the global asset tracing and preservation process.
During the 'sealed' period of the inquiry, the provisional Liquidator procured the services of investigative and legal professionals with a view to carrying out a far-reaching investigation into the asset holding structure of the enterprise. Furthermore the Court also issued a series of Requests for Judicial Assistance Abroad (the "Requests") to Courts in various jurisdictions. These Requests also perpetuated the sealed nature of the proceedings, in that the foreign Courts to which Requests were addressed were asked to recognise and provide assistance to the provisional Liquidator, by ex-parte application, and under the protection of a locally imposed seals and gags. The courts in all the requested jurisdictions recognised the provisional Liquidator and provided the assistance requested. A number of the requested Courts not only recognised and agreed to give assistance to the provisional Liquidator, but also issued a series of Norwich Pharmacal/Bankers Trust disclosure Orders addressed to various banks, real estate agents and other entities within the jurisdiction of such foreign Courts, designed to uncover the details of the asset holding structure employed there. Again all of this was carried out under judicially imposed secrecy orders (seals and gags); thus providing a crucial protection to the proceedings and to the results of the investigation.
In tandem with and alongside the Court sanctioned 'sealed' investigations, covert and discreet investigations were carried out with the assistance of private investigators. The results of those investigations were used to build a record which could then be relied upon in Court to seek further relief either (a) requesting further information from certain institutions by way of a Norwich Pharmacal/Bankers Trust Order for example, or (b) pre-emptorily freezing assets. At the conclusion of the sealed investigation period, the provisional Liquidator had uncovered the location of approximately US$150 million of camouflaged assets linked to the insolvent enterprise. The provisional Liquidator then moved simultaneously throughout the relevant jurisdictions to preserve those assets by way of a series of Freezing Orders. These Orders were supplemented by a round of search (or Anton Piller) orders and ancillary asset disclosure orders directed against the principal obligor and his core advisors.
The above serves only to capture a snapshot of what the process entailed. The process was a lengthy and complicated one. The various reliefs sought and obtained required thousands of hours of professional time and extensive Affidavits detailing and verifying the factual record. Without having obtained such relief ex-parte and under seal, it was a virtual certainty that the underlying obligor would have been in a position to frustrate the entire process and render the provisional Liquidator's asset investigation a futile exercise. The same reasoning can be applied to many such proceedings, regardless of whether the debtor has obtained his or her wealth by fraud or other criminal means in the first place. The interest of self-preservation always leaves open the temptation to seek to avoid at least some of the obligations owed when a debtor finds himself placed in a position where someone else takes control of his assets.
Applying for such relief ex-parte naturally means that the other side is not made aware of the fact of such proceedings. Where a provisional Liquidator has been appointed ex-parte, and the circumstances warrant it, such an interim office holder will be afforded an opportunity to 'get his act together' so to speak so as to establish the state of play and the location of assets prior to making any decisions as to the next step in the proceedings. Where there is any possibility that a debtor, whether it be a natural individual, or a body corporate, will seek to transfer assets that strictly speaking fall within the Liquidator's power and control (although of which he is not necessarily yet aware), it should be self-evident that ex-parte relief is called for. Maintenance of a sealing order over the remainder of the proceedings, pending the ability of the Liquidator to make an informed decision as to how to proceed, operates as an additional safeguard giving the Liquidator and his agents a period of time within which to conduct investigations and to gather all of the information necessary to ensure that as much of the estate as possible can be accounted for and ultimately made subject to a Freezing Order, if necessary.
In this context it is worth re-emphasizing the "Gag Order." During this ex-parte or sealed phase of the proceedings, if a Court is so inclined to sanction the use of this procedure, asset related information will be sought from a variety of different parties, including banks, accountants, lawyers and perhaps other service providers with whom or which the debtor has had contact. A Gag Order provides a means of ensuring that such parties do not disclose either the fact of the proceedings, or indeed the effect of them. While in practice this is difficult to police, it at least operates as a warning to those from whom information is requested that should they breach the terms of the Gag Order they will suffer the consequences, most notably being held in contempt of Court. It is also at least arguable that those subject to a gagging order but who 'tip off' the subject of investigation may be found themselves liable for loss occasioned thereby, or part thereof. 15
The ability to obtain confidential information over a defined period of time without the knowledge of the debtor enables the Liquidator to act more effectively in cases where the debtor may ultimately seek to avoid obligations. In such a way the Liquidator can be confident that he can compile an inventory of concealed assets which it is his duty to realise in order that he may then put in place the necessary mechanism for securing those assets. Indeed it is arguable that in certain extreme circumstances, where a Liquidator is aware, or should have been aware, that the debtor was such that he might seek to avoid his obligations the Liquidator is under a duty (within the ambit of his overall duty to realise assets) to explore avenues other than traditional ones, for obtaining information about and securing those assets. In an era where white collar crime has become almost endemic, the Liquidator must step up his game and adapt to meet those changing circumstances. Adapting to meet those changing circumstances demands consideration of procedures that might hitherto have been thought unconventional or extreme. If such procedures lead to a more efficient gathering in and realisation of assets for the benefit of creditors, then the Liquidator can be said to have carried out his duty effectively. In situations where the Liquidator fails to consider such options, there could at least in theory, be a cause of action against a Liquidator for failing to exercise the skill and diligence required of someone in his position. Such a situation is possibly a far way off. However it is nonetheless worth considering in the context of decisions taken by a Liquidator concerning his plan of action when confronted by cases of grand malfeasance or fraud.
1.This is in effect a relief that entitles the Court to grant an Order sealing the Court file and restraining all persons having notice of the proceedings from disclosing or communicating the fact or nature of those proceedings to another;
2.To which the sealing and gagging jurisdiction is ancillary.
3.In this context it is worth sounding a word of warning for those who seek to use ex-parte procedure as outlined above, in the European context. Firstly, the concept of sealing and gagging orders is effectively unknown in civil law jurisdictions. Insofar as recognition is concerned in a Judgment of the European Court of Justice in Eurofood IFSC Ltd., C-341/04, (which explores several key provisions of the European Insolvency Regulation (Council Regulation (EC) No. 1346/2000 of 29 May 2000 on insolvency proceedings)) the Court held that under Article 26 a Member State may refuse to recognise insolvency proceedings opened in another Member State where the decision to open the proceedings was taken in flagrant breach of the fundamental right to be heard, which a person concerned by such proceedings enjoys. The danger of allowing Member States to open insolvency proceedings on the basis of ex-parte applications for provisional measures is that such proceedings may not be recognised in other Member States. Obviously this is a consideration that will have to be weighed in the European context.
4.Lazard Brothers & Co v. Midland Bank Limited  AC 283. Authority at common law also exists affording the Court the power to recognize appointments of insolvency office holders by a foreign Court located in a place of business of the debtor (– or the so-called 'branch' insolvency proceeding).
5.For example, U.S. Courts provide for broad ranging discovery powers. They also recognise an inherent power to seal a court's record, as the Court in Estate of Hearst (1977) 67 Cal.App.3d 777 [136 Cal.Rptr. 821] stated – "Clearly a court has inherent power to control its own records to protect rights of litigants before it, but 'where there is no contrary statute or countervailing public policy, the right to inspect public records must be freely allowed.' [Citation.] . . . [Countervailing] public policy might come into play as a result of events that tend to undermine individual security, personal liberty, or private property, or that injure the public or the public good."
6.A Norwich Pharmacal Order is an Order that permits a wronged party to sue another for 'full information' regarding not only the identity of the wrongdoer, but also other information to enable them to being forward their claim. The jurisdiction to grant such relief is grounded in the facilitation – even innocent – by the party who comes under a duty to provide the information, of the underlying wrongdoing complained of. A Bankers Trust Order is an Order in aid of an asset tracing inquiry. Such orders are now termed information orders in England and Wales.
7.The Directive has been implemented into United Kingdomlaw by the Intellectual Property (Enforcement, etc.) Regulations 2006.
8.R v. Connolly  AC 1254 at 1301 per Lord Morris of Borth-y-Gest.
9.See Bekhor v. Bilton  1923. While this case refers to the use of the Court's inherent jurisdiction under section 37(1) of the Supreme Court Act 1981 in the context of the Mareva (or asset freezing) injunction, the same is applicable to section 7(1).
10.Information Orders is the term applied in the English civil procedure rules. These are essentially orders requiring a named third party to disclose certain information. They were formally called Norwich Pharmacal/Bankers Trust orders.
11.For example the English Civil Procedure Rules refer to the overriding objective in the following terms: CPR 1provides as follows:
"(1) These Rules are a new procedural code with the overriding objective of enabling the court to deal with cases justly.
(2) Dealing with a case justly includes, so far as is practicable -
(a) ensuring that the parties are on an equal footing;
(b) saving expense;
(c) dealing with the case in ways which are proportionate -
(i) to the amount of money involved;
(ii) to the importance of the case;
(iii) to the complexity of the issues; and
(iv) to the financial position of each party;
(d) ensuring that it is dealt with expeditiously and fairly; and
(e) allotting to it an appropriate share of the court's resources, while taking into account the need to allot resources to other cases."
This principle has been adopted by a number of Caribbean jurisdictions, so for example the Eastern Caribbean Supreme Court Rules 2000 refer to an overriding objective in almost identical terms to that of the English and Welsh CPR.
12.Parties who are defendants purely for the purpose of requiring them to disclose information within their power or procurement even if they have become innocently mixed up in a wrongdoing, the prime example being banks possessing information as to bank accounts in respect of which a Liquidator has an interest or suspects the Debtor may have an interest.
13.Both of which being protected under the European Code of Human Rights
14.The identifying names of the parties and some of the identifying facts of this case have been obscured or altered intentionally, and with a view to complying with a term of confidentiality contained in a settlement agreement relevant to this case.
15.Additionally, a bank may find itself in violation of applicable anti-money laundering laws if it knowingly tips off a customer who is suspected to be involved in fraud.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.