Guidance on undertakings for freezing orders issued

The BVI Court provides helpful guidance on undertakings for damages in respect of freezing orders sought by insolvency practitioners

BVI Insolvency practitioners (“IPs”) often wish to obtain interim relief, in the form of freezing orders, to preserve and protect the assets of the defendant(s) pending determination of claims they intend to bring.

As is well known, Courts usually require an applicant to provide an, often unlimited, cross-undertaking in damages (“Undertaking”).  Furthermore, in the event the applicant does not have sufficient assets in the jurisdiction to demonstrate to the Court an ability to meet any award pursuant to the Undertaking, the applicant is often required to fortify the Undertaking by providing security.

IPs are often faced with the unenviable position of having limited funding, and therefore the need to provide such an Undertaking, potentially fortified, could be a significant barrier to an IP seeking a freezing order.  If a freezing order cannot be obtained, that can result in the IP being unable or unwilling to bring an otherwise sound claim.

In a recent matter Grant Thornton act in, the BVI Court has issued a ruling which will be of great interest to insolvency practitioners and those who they act on behalf of.

Background

Grant Thornton have been appointed to three companies (“Companies”) which are alleged to have been used by Paulo Maluf, the former Mayor of Sao Paulo, and those closely related to him (including his son Flavio Maluf, “Mr Maluf”) to defraud the Municipality of Sao Paulo (“Municipality”) of over US$200 million (“Fraud”).  Further details of the background can be found at The funding of BVI insolvencies and Grant Thornton’s innovative approach and First reported BVI Court order to pool liquidation estates | Grant Thornton).

Our investigations revealed that a significant loan facility had been made available to Mr Maluf by one of the companies (“Applicant”) and that approximately US$40 million (before interest) remained payable to the Applicant (“Loan”).

A claim was established to recover the Loan and due to the wider context, and the findings of fraud in related cases in other jurisdictions, a freezing order was first sought to preserve Mr Maluf's assets. However, in view of the lack of liquid assets in the Companies, we needed to consider how best to provide the Undertaking.

Grant Thornton’s approach

We invited the BVI Court to limit the Undertaking to the value of the Companies' assets* from time to time, without the need for any fortification (or formal security) being provided to further support the Undertaking.

*as set out in the prior articles above, in a previous application to the BVI Court, the Court had ordered that estates of the 3 companies be treated as being, and be, notionally pooled for the purposes of inter alia the determination of distributions and the payment of fees and expenses. 

When considering this request, we invited the BVI Court to take into account a number of important factors including:

• The Jersey Court had found that 2 of the Companies were party to the Fraud;
• Paulo Maluf had been convicted of money laundering, arising from the Fraud, by the Supreme Federal Tribunal in Brazil;
• Flavio Maluf had been convicted of money laundering, arising from the Fraud, by the first instance court in Brazil, albeit this conviction is subject to appeal; and
• The Companies have significant, albeit illiquid, assets outside of the BVI.

The BVI Court granted the freezing order on the terms sought, again limiting the Undertaking to the assets of the Companies from time to time. 

Permission was also given by the BVI Court to issue the underlying claim for service out of the jurisdiction (in Brazil), and as part of that process the BVI Court's freezing order was first recognised in Brazil, in what is believed to be the first such direct recognition of a BVI freezing order by a Brazilian Court.

Mr Maluf later sought to challenge various aspects of the claim and the freezing order, including the basis upon which the freezing order had been obtained and the fact that the related Undertaking had been limited in the way that it had. The BVI Court however upheld the freezing order and the scope of the Undertaking and noted that the real purpose behind the application for an uncapped undertaking is to dissuade the liquidators from pursuing the current claim’.

Grant Thornton’s comment

The BVI Court has once again demonstrated its pragmatic approach to assisting IPs to make recoveries, particularly against the backdrop of fraud. Furthermore, the BVI Court has shown that it will look behind attempts to frustrate legitimate claims brought by office holders.

We welcome this decision and as a result of this we can continue this action to recover funds for the creditors of the Companies.