Vitaliy Kozachenko, Fortior’s Managing Director, was one of the key speakers at the Abu-Dhabi Argus Caspian and Central Asian Petroleum Markets Conference 2018.
An extract from Vitaliy’s speech appears below. If you are having problems with your offshore counterpart, please contact us so that we could consider possible solutions together.
In the Caspian, and in the rest of the world, a lot of trading and shipping business is conducted via off-shore companies in the BVI, Bermuda, UAE, Marshall Islands and other jurisdictions.
This creates an environment where some people feel they are judgment proof, i.e. even if the off-shore company is in breach of contract and there is a judgment against it, it may not have enough money to pay, and its principals may hide behind the offshore company’s corporate personality to avoid having to pay themselves.
There are many tools available at law to make your off-shore counterparty, or the people behind it, pay the offshore company’s debts. Here are five such tools, three of which can be used prior to or immediately after commencement of formal proceedings and two of which can be used once you have a judgment or an arbitral award against your offshore counterpart.
TOOLS FOR EARLY STAGES OF THE PROCEEDINGS
But negative example first: here is what you should not do when pursuing an offshore company. A textbook example of how to go behind a company is to invite the Court to pierce the corporate veil, i.e. invite the Court to disregard the separate corporate personality of the company and make the shareholders liable for the company’s debts. Case theories such as this almost always fail. They always fail in arbitration due to the limited jurisdiction of arbitral tribunals. Don’t use this tool! Instead consider some of the tools below.
Firstly, if you act quickly enough, you could obtain an interim injunction to compel your offshore counterpart to comply with its contractual obligations or refrain from breaching them. If it does not comply, then its directors, shadow directors and managers (i.e. potentially people with money) could get a prison sentence of up to two years. All you have to demonstrate to put them in prison is that they were aware of the injunction and did not comply. As opposed to the veil-piercing theory described above, you do not have to demonstrate fraud or intermingling of assets by the individuals in question. And, of course, if there is a credible threat that the people behind the offshore company will go to prison, then it is much more likely that you will be paid. In English courts, interim injunctions may be granted extremely quickly. Fortior’s client has recently obtained an interim injunction at 00.30am on a Sunday, following a telephone hearing with a duty judge in the High Court.
A subset of interim injunctions is an order freezing the respondent’s bank accounts, which is quite a popular remedy in English Courts. An important point here is that a standard freezing order in the English Courts contains an order that the respondent quickly provides an affidavit disclosing all its assets beyond a certain minimum threshold. Again, if this is not complied with, or provide incomplete or incorrect information, the people behind the offshore company may be subject to committal proceedings (i.e. sent to prison).
By prison sentences in this context, I mean a committal order which could be obtained as a result of separate civil proceedings against the responsible individuals for contempt of Court. The advantage of these proceedings over criminal proceedings is that the claimant retains full control over the process. The proceedings can be terminated at any time by the claimant, for example if the parties reach a settlement. By contrast, when one files a criminal complaint the matter is managed by state prosecution authorities who may decide to proceed to charge the responsible individuals even if the underlying civil dispute settles.
Secondly, there is an often-overlooked cause of action for tortious interference with a contractual relationship. This is especially relevant where you are dealing with a group of companies with overlapping management, or where you can demonstrate that the management of some other company than your counterpart knows about your contract with the off-shore company, and yet takes actions which cause the offshore company to breach the contract. In effect, what this allows you to do is to pursue someone other than your offshore counterpart, for example a company in the same group or an individual manager within the group. Depending on the jurisdiction where the individual or company you are pursuing are based, and depending on their financial standing, this may be a very effective tool to ensure that the offshore company, or the people behind it, meet their obligations.
Thirdly, if there is a state behind your off-shore counterpart, or if the off-shore counterpart breaches the contract as a result of state pressure, then you could also pursue the state itself. Pursuing a state in state courts is usually impractical. But you might be able to sue a state in an investment arbitration.
There are different sorts of bilateral and multilateral treaties, pursuant to which arbitration could be commenced against a state. The one particularly relevant to the Caspian region is the Energy Charter Treaty, to which most of the Caspian states, in the wider meaning of the term, are parties, including Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan.
The treaty is intended to protect investment in the energy sector, and has an extremely wide definition of the term “investment”, much wider than a lot of bilateral treaties and national investment laws. A famous example of the use of this treaty is the Petrobart case, where Petrobart supplied gas to a Kyrgyz state company for which the company failed to pay. Petrobart’s attempt to recover the debt via Kyrgyz state courts have failed. Petrobart lost UNCITRAL investment arbitration proceedings pursuant to Kyrgyz foreign investment law, because the definition of investment in that law was not sufficiently wide to cover gas sales contracts. But then Petrobart won in a Stockholm arbitration commenced pursuant to the Energy Charter Treaty, obtaining an award of damages against the Kyrgyz state itself.
TOOLS TO USE AFTER A JUDGEMENT OR AWARD
If you already have a judgment against an offshore company and do not know how to enforce it, then you might consider the following options.
Firstly, if it is an English judgment (and English arbitral awards can be recognised as English judgments very quickly), you could compel the offshore company’s directors to come to England and disclose assets and information on cross-examination by an English judge or a Master. If they do not come, the Court may make an order for their committal to prison for contempt of Court. If they make a disclosure which you later discover to be incorrect, they might likewise be sent to prison.
This order must be accompanied by intelligence and legal advice on the ground, given that people tend to lie about their assets. Of course, if you obtain false disclosure and cannot prove that it is false, then it is not of much use. Fortior has a network of law firms and consultants in the Caspian region who are able to provide the necessary advice and assistance in this context.
Secondly, if you have good intelligence and can prove that money is passing through a company, and ideally that it is going through an English bank (whether in the form of a letter of credit or other form), you could seek an order that instead of the being paid to your debtor the money be paid to you. This is called a third-party debt order.
The standard use of this is when the claimant knows that the defendant has money in a bank and it seeks an order to the effect that the bank pay the claimant instead of the defendant. This has been adapted recently to cover much broader classes of assets than money in a bank.
In Taurus Petroleum v State Oil Marketing Organisation of Iraq (“SOMO”), Taurus obtained an arbitration award against SOMO for over US$7 million in demurrage. SOMO would not pay. Taurus gathered intelligence to the effect that SOMO was selling oil to a third party, and the third party was paying for that oil by a letter of credit opened with a bank in London. Taurus therefore applied for, and obtained, an interim (ex-parte) third party debt order to compel the London bank to pay Taurus instead of SOMO.
The issue was then (i) where was the debt located (SOMO argued that since the payment was to be made via an intermediary bank in New York, and therefore the debt was located in New York and the English Court had no jurisdiction); and (ii) whether SOMO, as an Iraqi state company, had the benefit of sovereign immunity (it was argued that it was in fact a department of the Iraqi state).
Both arguments failed, with some of them going up to the Supreme Court. SOMO could not rely upon sovereign immunity because the sale of oil was an act of commercial nature rather than of sovereign character and therefore there could be no state immunity. While the bank who issued the LC was a French bank, the LC was issued via its branch in London. Hence the debt was located in London and therefore the English Court had jurisdiction.
There are many other tools available at law to make your unwilling debtors / offshore counterparts pay. You should not give up on your collection efforts simply because you have an offshore company potentially with no assets as your counterpart. Contact us and let us consider the options. If you act quickly enough, it may be that we could save you a lot of money and/or solve your issue very quickly.