- Multi jurisdiction offshore structures: complexities and alternative approaches
Multi jurisdiction offshore structures: complexities and alternative approaches
By Hugh Dickson
The use of offshore structures involving multiple jurisdictions has become common. Practical problems arise when the jurisdiction of incorporation is separated from the assets, information and creditors by geographic and legal boundaries are not easily resolved by cross border recognition applications. In such cases, having local insolvency and restructuring resources can be invaluable.
Use of 'offshore' vehicles
The use of cross border structures with multiple offshore jurisdictions for fraud and asset concealment is well known. The confidentiality/secrecy provisions common to offshore jurisdictions, and the use of multiple jurisdictions, assists with 'layering' and adding to the cost and complexity of investigation. However, there is also extensive use of such structures for legitimate purposes. These include specialist legislation and offshore concentration of professionals dealing in particular industries, and tax neutrality and arbitrage.
Regulatory, collateral rights and capital flow restrictions in some onshore jurisdictions, which would otherwise handicap the realisation of investments or capital raising is another - exemplified by the now common use of offshore structures to hold assets in countries such as China. Regardless of the rationale for these structures, the separation of assets, records and operations across multiple jurisdictions make insolvency or restructuring more complex.
Common problems associated with offshore insolvency and restructuring
Control of assets and proceedings in foreign jurisdictions.
Other jurisdictions may not recognise the insolvency practitioner's authority, even those that have adopted the UNCITRAL Model Law (see below). A similar issue applies to the enforcement of judgments or orders handed down by the domestic court. The problem is more acute where the structure includes both common law based offshore jurisdictions and civil law jurisdictions. In the absence of cross border recognition, obtaining assistance through alternate mechanisms such as the Hague Convention can be extremely time consuming, and is not guaranteed to succeed.
Investigation, tracing and recovery
Investigatory powers granted may not be recognised or legal in another jurisdiction. Even access to the company's own data or transactional documents may restricted. The inclusion of jurisdictions with confidentiality laws exacerbates the problem. Whilst offshore jurisdictions are typical examples, the issue is not unique to offshore jurisdictions. For example, providing an overseas practitioner with the company's own data held in Switzerland can constitute a criminal offence.
Inconsistency in law across jurisdictions/legal arbitrage.
This can lead to problems in enforcing powers and remedies that apply in the domestic jurisdiction but not others in the structure. The opposite can also be true, with the non-domestic jurisdiction offering the practitioner greater scope. However, that has been curtailed within common law jurisdictions by the Privy Council decision in the Saad Investments case (concerning Cayman liquidators' attempts to compel a Bermudan based auditor to divulge records).
The Board found that a practitioner could not benefit under common law assistance from powers greater in the recognising jurisdiction than they would be able to apply in the primary jurisdiction.
Where you have critical functions split across jurisdictions (increasingly common in a globalised world), any solution must address the problems in each jurisdiction in parallel. Providing equity in outcomes is helpful in reaching consensus, but can be extremely difficult in the absence of common principles in the treatment of creditors and the ability to bind consensus. The immediate issue is typically the difficulty in imposing a moratorium against creditor actions - intended to ensure equity - which can be extremely damaging to ensuring an equitable outcome across jurisdictions.
Limitations of legislative solutions
Twenty years ago, the UNCITRAL Working group issued the Model Law. The concept was that states would have a consistent approach to identifying the 'main proceeding' based on the principle of the Centre of Main Interest (COMI). They would recognise the foreign practitioner's authority and cooperate in facilitating a process based on the main jurisdictions legislation.
A number of jurisdictions have adopted the Model Law, either directly or by following its precepts - such as the European Union with its Regulation, and the US, which claims to have based Chapter 15 on it. However, uptake has not been universal. There has also been limited uptake of UNCITRAL model law by the traditional offshore jurisdictions, where mechanisms for recognising foreign appointees and providing commensurate powers are often limited, untested or where there can be a distinct preference for protecting the jurisdictions sovereignty.
Even where adopted there have been practical problems in its application. Determining COMI has been a major issue, given the Model Law's approach of providing guidelines rather than discrete and determinative criteria. That has been of little practical assistance when faced with issues like:
- the hedge fund industry, where entities are virtual vehicles with no employees or physical place of business,
- globalised businesses which may have different aspects of the business -all critical - located in different jurisdictions,
- differing law/directives on determining COMI
For example, obtaining recognition for offshore hedge funds from the US courts was a major problem before the landmark Fairfield Sentry case. However, that decision relied on the determination that the COMI test should be based on the facts applying at the time of application for recognition (at which point Fairfield was under control of the offshore liquidators), not the commencement of the main proceeding. Latest guidance from UNCITRAL indicates that the commencement date should be determinative. If this taken up by the US courts offshore hedge funds will once again face difficulties in obtaining recognition in the critical US jurisdiction.
Another example is that of Australia - where the Saad Investments case was the first application for recognition under their Model Law based system. Despite recognising the Cayman based liquidation as the main proceeding, the highest court in Australia ruled that the liquidators' ability to intromit with the Australian assets was subject to protecting the claims of the Australian tax authorities.
The European Union Regulation on Insolvency Proceedings is based on UNCITRAL principles, but despite numerous amendments, arguments remain over the identification of COMI and the recognition of cross border authority. In 2016, the EU commenced a project intended to address this by instead harmonising insolvency law. The complexities of obtaining consensus on that will be considerable, quite apart from the impact of Brexit.
Finally, the Model law relies on the presumption of a 'proceeding', and local interpretation of what constitutes a proceeding can prove problematic for some forms of insolvency or restructuring such as receiverships or regulatory interventions. Of course, none of the above matters where countries have not adopted the Model Law.
Even the so-called Universalism movement in common law jurisdictions, assuming the judiciary would use common law authority and discretion to attempt to achieve comity in the absence of statutory provision, have proved less than successful, as demonstrated by the Rubin and Eurofoods cases, and latterly the Privy Council decision in Saad.
The reality is that the problems of cross border are not only material, but also are likely to persist for some considerable time.
In the meantime, professionals must consider the practical alternatives in dealing with jurisdictions that have no recognition mechanisms, or where that recognition is impaired or constrained.
Duplication of cost is an issue, as are potential difficulties in co-ordinating approaches between appointees. There is the risk of the proceedings being subject to conflicting directions by the differing regulatory or court authorities, and conflicting law that may mandate different treatment of creditor classes. However, they do resolve the issue of local authority, and a parallel proceeding provides certainty on the moratorium issue. Duplicative costs may be limited, particularly if using a single firm of professionals with offices in all jurisdictions. The firm's internal procedures can help address the coordination and consistency of approach issues. The contrasting law risks depend entirely on the jurisdiction, and it is surprising how many elements can be consistent between jurisdictions, especially if all common law based.
Finally, the parallel proceeding may offer authority and relief not available in the main jurisdiction. In the Saad Bermuda case, for example, whilst the Cayman liquidators were denied access to Bermudan statutory powers under common law principles, there was no contention that they would have been able to access the statutory powers with a parallel proceeding had there not been a procedural problem with their parallel appointment.
Use of non-judicial authority
The creative practitioner should look to what methods and authority can be employed in a third party jurisdiction without relying on statutory authority in that jurisdiction. At one level that can be as simple as using their authority over the domestic entity to instruct the repatriation of assets or data to the domestic jurisdiction, whether directly or through management. In offshore holding company structures practitioners are used to indirectly asserting authority over subsidiaries by exercising their power qua shareholder rather than those directly granted by the Court - indeed, in some jurisdictions such as the PRC it would be a criminal offence to do the latter whereas the former is perfectly permissible.
Whilst the absence of remotely accessible public registers can restrict information access from the main jurisdiction, local professionals' networks can access information and intelligence not readily available to outsiders, and even simple physical access to registers or court records not on line can be invaluable. Where regulatory restrictions limit the appointment of foreign professionals to formal proceedings or regulatory investigations, local resource can open the potential for parallel proceedings under co-ordinated control of a single firm.
The use of alternative approaches may not be a solution in every case. However, given the practical problems, a creative approach is critical. An international network that spans the jurisdictions and facilitates joint appointments and local representation where recognition is possible and parallel proceedings or direct action where it is not, can significantly mitigate any problems. Above all, it is a critical advantage in having the understanding necessary to devise, and the resources to deliver, a co-ordinated strategy to address the challenges.
This article appeared in the Fourth Edition 2018 of Business Restructuring and Insolvency Report