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Even in cases of fraud, it is still possible to get redress, argues Mark Cooper.

Most financial services institutions have portfolios of impaired assets. Some of these are subject to restructuring or other workout arrangements.

Some, however, are so impaired – perhaps by fraud or other wrongful acts – that the only way to mitigate losses is to take action against the counterparties.

This is an area where institutions are increasingly calling on their legal advisors. But how can it be done in practice? And at what cost?

Assessment – can it be done?

The first step is a high-level review of the portfolio in order to identify those assets which present the best opportunity for recovery. This triaging is not just about the legal merits, but the practicalities of bringing legal proceedings and enforcement of any judgement or award.

The assets identified will then require more detailed investigation. This is where expert advice may be needed, perhaps from forensic accountants, or experts in the particular product or market.

Where the matter is cross-border, local lawyers may also need to be involved.

Concurrently, it is important to conduct an asset trace on potential enforcement targets to ensure that any legal victory is not a hollow one. This can involve anything from analysis of publicly available material, on databases and social media, to good old-fashioned detective work, in-person surveillance and investigation.

Of course, all of this costs money, which more often than not has been the barrier to institutions taking action. But institutions should not assume that all costs will necessarily fall to them.

Through a combination of third-party funding and insurance, costs and cost risk can be shared and mitigated. For example, non-recourse funding is available for the payment of an institution’s legal costs and disbursements, in return for a multiple of their investment, or a proportion of what is recovered.

‘After the Event’ insurance is also available to protect an institution against an adverse costs award in the event it loses in the context of legal proceedings. 

The law firm in this structure might either act on a traditional retainer, paid by the funder, or agree to risk a proportion of their own fees in return for an increased fee in event of success.

This is known as a Conditional Fee Arrangement. It not only reallocates the cost risk, but it also has the effect of aligning the law firm’s commercial interests with the institution.

Importantly, this is only one potential model, and there are a number of ways in which it can be adapted in order to suit the particular needs of a case or institution. 

These might include funding for only part of the proceedings (such as enforcement) or seed capital for the initial due diligence, or a structure whereby there is no direct contractual relationship between institution and the funder.

In some cases, the institution may even consider simply selling on the claim – leveraging the work undertaken to date on the assets – in return for a capital injection.

Recovery – the practical steps

Legal proceedings – whether that means arbitration, insolvency processes, litigation or a combination of the three – can be brought to try to force an early settlement or achieve a judgement or award which can then be enforced.

One crucial decision will be where such proceedings are brought. This will clearly be influenced by the location of assets, but also what legal and procedural remedies are available in that jurisdiction. 

Legal proceedings might include:

  • Pre-action disclosure to identify wrong-doers, trace assets and/or obtain the necessary information to bring a claim, followed by further disclosure once proceedings are underway.
  • Domestic or worldwide freezing orders or, in the case of insolvent companies, the appointment of provisional liquidators where there is a risk that assets may be dissipated, hidden or otherwise put beyond the institution’s reach while it seeks judgement.
  • Search orders to enter premises to find, copy and remove documents in order to preserve evidence.
  • Putting insolvent companies or individuals into insolvency processes (including restoring dissolved companies to the register) in order to use statutory powers to investigate the companies affairs and potentially challenge transactions.
  • Seeking summary judgement on all or part of a claim or identifying preliminary issues to be tried in advance, in order to drive early resolution.
  • Where a party breaches a freezing order or search order, proceedings against them for contempt of court (the penalty for which, in England and Wales, is imprisonment, a fine and/or the seizure of their assets) and the appointment of receivers over assets which are at risk.

The timing and coordination of these proceedings – especially if they span multiple jurisdictions – will be vital. This is not just to build pressure on the defendant, but also to obtain evidence and make it available for use at the right time and in the right place, and, crucially, to preserve assets. 

Enforcement and other options

If everything goes well, the final stage is enforcing any judgement or award made.

This may include the charging or attachment of assets, third-party debt orders – e.g. where assets in the hands of a third party, such as a bank account, are frozen and seized – bankruptcy, liquidation, or taking control of goods.

Just as commercial drivers may mean some institutions sell on a claim prior to judgement, consideration should also be given to sale after judgement when the return – as compared to pre-judgement – will likely be far greater. 

As before, this can provide an injection of liquidity, while leaving the often-difficult issue of enforcement to someone else.

In conclusion, portfolios that are non-performing owing to fraud or underlying wrongdoing need not just be written off. If a viable claim exists, there are a number of options for institutions, and the availability of litigation funding and insurance means these can be pursued at little or no cost risk.

Nor is recovery necessarily only measurable in multiple years. There are various means of pressing early settlement or recovery, as well as potential exit routes along the way while realising the benefits of the work undertaken.

There are currently significant sums sitting in impaired asset portfolios worldwide. Financial institutions would do well to consider if it is not time to start taking action.


Mark Cooper is a partner at international law firm Eversheds Sutherland.


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