Hunting Hidden Treasures
By Bettina Knötzl, Knoetzl
As international commercial links increase, it becomes more and more important for creditors to collect on claims across international borders, to be able to locate assets and – with the assistance of the courts – to act quickly to attach them. Litigators find themselves more frequently engaged in cases where their clients are victims of white-collar crime such as fraud, breach of fiduciary duties, deceit and corruption, or they may be simply asked to collect outstanding receivables in various jurisdictions.
By contrast, judgment debtors will frequently attempt to use sophisticated tricks to move assets around in order to put them beyond reach of their creditors, often within such debtor’s own international corporate structures. Debtors playing such games always seem to manage to remain one step ahead of their victims.
For this reason, litigators, business crime lawyers, financial specialists and “private intelligence” experts from around the world have organised international networks in order to put a stop to the shenanigans of evasive debtors. The ICC FraudNet group of the International Chamber of Commerce is one example of an organisation created by top-tier litigation experts in pursuit of a single goal: asset recovery, allowing the victory in court to be turned into real money to be returned to the pockets of their clients.
To achieve this goal, it is important for legal counsel to pursue debtors as efficiently and quickly as possible when seizing concealed assets. The first step in this process is to identify the assets, and the second is to “repatriate” them. To this end, the strategy will often involve applying for the assistance of the courts to seize the identified assets and to have them blocked by means of a “freeze order” (also known in Austria as “interim measures”). When the assets are frozen, the lawyer has won the first round at the level of asset tracing: the asset is removed from the debtor’s free disposition and the outstanding legal issues become a matter for the courts – in proceedings which may go on for years. At the end of that process, the frozen assets, which would otherwise long be manoeuvred out of reach, may be liquidated in favour of the client or, if the debtor ultimately prevails in the main proceedings, the attachment may be set aside.
Forming a Global Strategy Rather than Mere Local Action
Hurdles to successfully apply for interim measures, such as freeze and blocking orders can vary significantly from jurisdiction to jurisdiction. Many jurisdictions require, aside from proof of the claim – usually with reduced level of proof – proof of a sustainable (or irreparable) damage, in the event the interim measure is denied by the court. Some courts require security to cover potential losses of the opponent. This is often the case, even if an attempt by the opponent to dissipate funds has been demonstrated to the court. Some jurisdictions, however, (like the Netherlands) are traditionally known for swift and rather easy access to provisional protections of creditors. Lawyers across the globe, who jointly seek to find the best strategy to protect their clients’ interests, therefore, need to understand the tools that are globally available, and to understand their effects, such as the possibility to petition for a “worldwide freeze order” – which has a blocking effect beyond the home jurisdiction where the granting court is based. Its effectiveness is, of course, directly linked to its enforceability, which also varies from country to country. Even if a UK court issues a worldwide freeze order, the local court outside the UK still needs to enforce it. Otherwise, an extra-jurisdictional judgment remains a simple obligation within the issuing jurisdiction but cannot be turned into a factual impossibility to dissipate assets held elsewhere. Thus, local action might be needed, perhaps even simultaneously, if alerting the opponent increases the risk of malicious actions.
When forming the strategy and making the decision of where to strike first, or where simultaneously and where next, asset tracing specialists need to understand the available options and their effects, because an in-depth practical understanding of the actual practice of the relevant, local courts is of utmost importance. The law – standing alone – is an insufficient answer. Only if it is actually applied in practice by the courts, in a swift, effective manner, can protection be secured.
Local Practice Matters
Turning to Austria, we always have an uphill battle, as evidenced by the age-old, well-known conversation between a law professor and his student. The professor asks his students, “What is a temporary restraining order?” One of the students, after a moment’s reflection, replies, “Denied, Professor.”
The Austrian courts are internationally renowned for their reluctance to award interim injunctions. The statutory hurdles set up by the Austrian Execution of Judgments Act are relatively high. This situation is then compounded by the restrictive jurisprudence of the Austrian courts. For this reason, litigators seeking to use “interim measures” on behalf of potential victims to avoid losing out when debtors attempt to conceal assets often fail in their quest to obtain legal protection; particularly frustrating is the fact that they have little chance of challenging incorrect or insufficient court decisions.
A Case from Real Life
This is illustrated by the following actual case, in which the evidence was actually more favourable to the creditor than in the usual situation.
K-GmbH, a borrower headquartered in Lower Austria, owes B-AG, a Ukrainian bank, roughly €7 million under an investment loan. Without any prior warning, K suddenly ceases making required repayments. B, in accord with their agreement, calls the loan and demands repayment.
However, B’s contacts at K have gone underground. Simultaneously, newspaper reports are flying around that speak of the arrest of K’s Belarusian managing director. B thereupon secures an enforceable judgment against K-GmbH, in line with an arbitration clause in the credit agreement.
The only (unencumbered) assets of K known to B are a property K owns in Austria. Therefore, prior to the conclusion of the arbitration proceedings, B considers attaching the property by an injunction on sale. The sudden, serious default in payment, the sudden disappearance of the persons in charge at K and the disturbing arrest of the managing director give rise to fears that K finds itself in very serious problems of liquidity, and might therefore sell the property to raise cash.
In Austria, the chances of a creditor obtaining an interim injunction in circumstances like these are slim to none. The court costs in the case are daunting, at €22,000, and thus the decision-makers at B hesitate.
Changes on the Land Registry
As B continues to reflect, and while the arbitration is still going on, there becomes a changed status of the property on the land registry: a priority notice is recorded for an intended sale. Now, there is an imminent risk of harm, because it is obvious that there are specific intentions to sell the property. One might expect an interim injunction to be issued immediately.
And yet, the District Court did not regard the risk of harm to be sufficient in this case. In the court’s own words, “the temporal link between the respondent’s cessation of payments and the recordation of the priority notice of sale might indicate that the intention was to sell the property in order to continue paying off the loan.”
The court denied the grant of interim measures, because it found that the creditor had failed to demonstrate good cause for measures of attachment. The regional court, the appellate court in the case – to which B paid a further €33,000, flat-rate court fee in order to obtain correction of the lower court’s decision – did nothing more than confirm the decision of the court of first instance.
Sold to the Parent Company
B had thus reached the end of the line in the Austrian courts. K was now able to freely dispose of the property. After the arbitration award was issued in favour of the claimants, and the claimant was about to enforce the award by realising on the property, K immediately sold the property to its own parent company in accordance with the priority notice.
Of course, no purchase price was ever actually paid. The property changed owners, and yet no money changed hands. The debtor had frustrated enforcement of the arbitral award, and it had succeeded in doing so in full view of the Austrian courts.
Criminal Law Comes to the Rescue
In addition to a possible claim against the judicial authorities for a manifestly incorrect decision, and a claim in nullity proceedings under civil law to set the sale aside, asset tracing lawyers also have the more robust tools provided by resort to criminal law at their disposal. It is particularly worth noting that the criminal authorities can also order a freeze of assets to secure claims under civil law. Sec. 115 of the Code of Criminal Procedure has shown itself to be a highly effective legal tool – as it became in this particular case.
Only a few days after the filing of the criminal report for the offence of intentional evasion of judicial enforcement, the criminal authorities seized the property from the parent company. The regional court with criminal jurisdiction, which had refused interim measures when seized with the matter in a civil law capacity, acted with alacrity in approving the seizure in the criminal action. Subsequently, the Office of Public Prosecutor also set aside the next priority notice, because the debtors were already preparing for the next sale.
The criminal actions would never have gone past the attempt stage if the civil courts which had been seized with the matter had permitted attachment of the property. It would not have been necessary to involve the criminal courts or prosecutors at all, and the judicial resources would have operated efficiently at that stage, as one might reasonably expect when paying €55,000 in court fees.
When held up to international standards, the fact that it ultimately became necessary to deploy the full force of the criminal law and authorities certainly does not cast a favourable light on the efficacy of Austrian civil courts in the realm of interim injunctions.
Asset tracing specialists and creditors at home or abroad have a justified, hopeful, expectation that the jurisprudence of the Austrian civil courts will improve. One can only hope.