From discord to harmony: the future of cross-border insolvency · activity in the financial services sector. Jurisdictions need to ensure their basic legal process and infrastructure

From discord to harmony: the future of cross-border insolvency

Contents Foreword 3

Executive summary 4

A clear desire for progress and reform

Cross-border insolvency 6

Recent trends and anticipated future activity

What makes a jurisdiction attractive 8

Perceptions of offshore centres

Call for consistency 12

Fostering collaboration and harmonisation

Conclusions 15

Questions and discussion points arising

from the research

Benchmarking cross-border insolvency 16

A snapshot of perceptions of eight leading

offshore jurisdictions

3From discord to harmony

Foreword

There has been considerable recent movement of the tectonic plates of cross-border insolvency. New judicial appointments are being made, the UNCITRAL Model Law and the EU Regulation on Insolvency Proceedings continue to shift cross-border frontiers, important judgments in recent insolvency cases such as Singularis are shaping legal principles in the common law sphere, and the media is increasing its scrutiny of activity in offshore jurisdictions. Taken together this activity gives rise to a cross-border insolvency landscape that continues to evolve.

With the number of cross-border insolvencies anticipated to rise in the near-term, now is an appropriate time to consider what sort of legal infrastructure is required to meet this projected growth, and to ensure the major offshore jurisdictions which are (the focus of this report) suitably prepared for the future. Whether cross-border insolvency works effectively in the future or not will depend upon jurisdictions operating efficient court systems, supported by robust legislative frameworks and workable practices for collaborating with other jurisdictions.

Grant Thornton UK LLP and South Square have joined together to commission this research report investigating the perspectives of senior lawyers and other professionals at the forefront of cross-border insolvency. We wanted to find out more about their experiences of conducting international insolvencies across different common law jurisdictions and what they regard as the biggest challenges as well as opportunities for improvement.

We would like to thank all participants who took part in our online research. Particular thanks are given to those who gave up additional time and provided further input to help us with this project.

The results of our research are eye-opening and draw attention to significant gaps between what participants say they expect of jurisdictions and the realities they encounter. They stress the need for greater harmonisation and collaboration between jurisdictions.

Our research is as much about perception as about the underlying facts. It is difficult, for example, to determine empirically whether a court system does or does not work. What this report focuses upon therefore is whether its users, either internal or external, think that it does work. It highlights where there might be a need to improve user perception rather than seeking to provide instructions for improving the underlying factor.

We hope that you find From discord to harmony interesting and useful in providing insights into the perceptions of leading professionals undertaking cross-border insolvencies in major offshore jurisdictions. We also hope our research will be a trigger for a wider debate about how all those involved in the legislative and judicial process might learn from each other and work more closely together in the future.

Steve Akers Grant Thornton UK LLP

Felicity Toube QC South Square

4 From discord to harmony

Executive summaryA clear desire for progress and reform

How might cross-border insolvencies involving offshore jurisdictions, a complex and interconnected area of law, be improved upon in future? Which offshore jurisdictions are perceived to be high performers and what can be learned from these jurisdictions? These questions were asked of more than 80 leading practitioners involved in cross-border insolvency today, and their answers form the basis for From discord to harmony.

This report explores the factors that are regarded by participants as shaping the attractiveness of an offshore jurisdiction and to what extent different jurisdictions meet these criteria. From discord to harmony explores strategies for fostering greater collaboration between jurisdictions to improve cooperation and consistency, and ends by focusing on perspectives of eight of the offshore jurisdictions: Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Hong Kong, Ireland, Isle of Man and Jersey.


Respondents anticipate an increase in future cross-border insolvencies.

63% of research respondents say the number of insolvencies involving offshore jurisdictions will increase over the next three years. This includes one in five respondents (19%) who say the level of activity will ‘increase considerably’ over this period. This will largely be driven by an uplift in activity in the financial services sector.

Jurisdictions need to ensure their basic legal process and infrastructure is fit for purpose.

Getting the basics right is critical for effective cross-border insolvency proceedings, yet respondents expressed the view that these basics are not implemented consistently at the moment. Legal process and infrastructure is cited by two-thirds (67%) of respondents as the most important attribute for evaluating the attractiveness of an offshore jurisdiction, but on average they score current performance as less than seven out of 10.

The Cayman Islands emerges strongly as a preferred jurisdiction, resulting from what are viewed as effective insolvency laws.

Among all the offshore jurisdictions explored in this research, the Cayman Islands is most frequently cited by our respondents as the jurisdiction with the most effective insolvency laws. Almost two-thirds of respondents (63%) place the Cayman Islands among the three most effective offshore jurisdictions. This is followed by the British Virgin Islands (48%) and Hong Kong (37%).

Singapore is a very strong location for cross-border insolvency, but those with no experience of its processes are not aware of its strengths.

Three-quarters (75%) of respondents with direct experience of undertaking multi-jurisdictional insolvency in Singapore place it among the three most effective offshore jurisdictions. However, Singapore is not scored so highly by respondents who provided feedback on the jurisdiction without direct experience there. This suggests a significant perception gap exists.

All jurisdictions show room for improvement, with perception scores noticeably low.

It is clear that no single jurisdiction has got everything right, with each offshore location demonstrating both strengths and weaknesses according to the research respondents. When asked to rate each jurisdiction against a range of different attributes the average scores received are noticeably low, and in most cases below 6 out of 10.

Respondents want to see collaboration rise further up the agenda for offshore jurisdictions.

85% of respondents say that courts in different jurisdictions should collaborate more to make multi-jurisdictional insolvencies fairer and more efficient. Suggestions for fostering further collaboration range from formal mechanisms such as enacting the UNCITRAL Model Law, through to informal channels for greater dialogue and information sharing between judges.

1

3

4

5

6

2

Six important headlines emerge from this research:


Cross-border insolvencyRecent trends and anticipated future activity

Despite the economic turbulence of the last decade, insolvency activity has been relatively subdued. As the world economy globalises and businesses depend upon ever more geographically fragmented supply chains and third-party relationships, it is logical that insolvency proceedings involving multiple jurisdictions should constitute a sizeable proportion of the total. Recent estimates suggest that within the EU, for example, approximately 600 companies enter insolvency every day; a quarter of these involve a cross-border element, and many of these will encompass offshore jurisdictions.1

The impact of low interest rates and regulationInsolvency activity has been depressed by a period of unprecedentedly low interest rates which have lowered the cost of debt. According to one respondent with many years of experience undertaking insolvency in offshore centres: “We were busy during the financial crisis, but certainly not as busy as we might have been. Low interest rates have been a big help: everywhere people are trying to save companies rather than let them go into administration.”Coupled with low interest rates is the positive impact of regulation, particularly of the insurance and banking sectors, which has been tightened up to prevent the failure of major institutions.

Another important factor to consider when assessing insolvency trends is a broader shift away from litigation to other forms of dispute resolution and preventative measures of risk management. Corporates increasingly view litigation as an expensive and time-consuming mechanism; they are actively engaging with other forms of dispute resolution such as mediation and arbitration, which are available outside of the court system. Similar principles are being applied to insolvency, with preventative restructuring measures taking precedence as a means to keep businesses trading. In addition, initiatives such as INSOL International establishing a College of Mediation (IICM) in 2015 which aims to deal with insolvency and restructuring related matters “where mediation offers a more satisfactory method of resolving issues for the parties than litigation” is clearly in response to the anticipated increasing importance of mediation going forward.

Figure 1.

To what extent do you think that the number of insolvencies involving offshore jurisdictions will increase or decrease in the next three years?

Almost two-thirds of respondents anticipate an increase in the number of insolvencies involving cross-border jurisdictions over the next three years.

1. Accountancy Age, ‘European Union backs cross-border insolvency proposals’ (2014), http://www.accountancyage.com/aa/news/2327322/european-union-backs-cross-border-insolvency-proposals

63% anticipate

an increase

Increase considerably

Increase a little

Decrease a little

Stay the same

Don’tknow

Decrease considerably

18%

11%

6%3%

19%

44%


Painting a picture of the futureSo what might the future hold for insolvency, and for cross-border insolvency in particular? Looking ahead, 63% of insolvency professionals anticipate that the number of insolvencies involving offshore jurisdictions will increase over the next three years, see Figure 1. This contrasts with just 21% who believe that activity levels will decrease over the same period.

The persisting uncertainty surrounding macroeconomic challenges, such as the potential breakup of the Eurozone, volatility in foreign exchange and commodity prices, and the slowdown of fast-growth economies such as China, are all cited by experts as contributing factors to a potential increase in insolvency activity. “When interest rates go up there may be problems with property markets, and if the capital inflows from China or Chinese GDP growth itself slows down, then that could signal a major concern too,” says one Hong Kong-based respondent.

Financial services and real estate driving growth of insolvencysWhen asked where they expect growth in insolvency activity to come from, seven out of ten respondents (70%) believe that financial services will be the sector that contributes most to a future rise in insolvency, see Figure 2. This is followed by 54% who believe the real estate and construction sector will be responsible for a sizeable proportion of increased insolvency activity. Delving deeper into the data reveals financial services is cited as the lead growth sector for cross-border insolvency in seven out of eight major offshore centres. Only in Guernsey

is financial services placed second behind real estate.

Both financial services and real estate have been heavily dependent on low interest rates to fund growth and so any asset bubbles may be vulnerable to unexpected future economic shocks. It is the prevailing view among the respondents that the availability of cheap debt may only have delayed the number of insolvencies witnessed in recent years rather than eliminated them altogether. Significant stresses remain in the world economy and problems still exist at sovereign level and at large banks and corporates.

In summaryAnticipating the future is always fraught with difficulties, but the research participants are clear that they expect the level of cross-border insolvencies involving offshore jurisdictions to increase over the next three years. Assuming they are correct, this raises an important question: are the legislative frameworks and court infrastructures in offshore jurisdictions sufficiently prepared to meet the rise in the number of cases?

With insolvency activity set to increase, it is important that everybody has confidence in the ability of the courts in all of the major centres to respond. Now is the ideal time for offshore jurisdictions to review their current protocols and procedures and to implement any changes needed to address some of the perceptions that still persist about their handling of cross-border insolvencies.

Figure 2.

Which industry sectors do you think will see the greatest increase?

The growth in the cross-border insolvency activity will be driven by financial services and real estate and construction sectors.

Financial services

Hotels & leisure

Energy, clean tech & sustainability

Technology, media, communications

Business support services

Industrials & extractive

Healthcare

Government & public sector

Consumer markets

Not-for-profit

Other

Real estate & construction

70%

54%

34%

30%

28%

14%

10%

8%

8%

6%

0%

4%

70% of respondants believe that financial services will be the sector that contributes most to a future rise in insolvency


The legal process and infrastructure 84%

63%

40%

38%

28%

14%

14%

7%

1%

1%

1%

1%

1%

0%

6%

Cross-border assistance provisions

Enforceability of foreign court orders and judgments

Providing rescue mechanisms for corporate financial difficulties e.g. administration and reorganisations involving courts

Ability to put a foreign company into liquidation or other insolvency processes

Ability to obtain financial information about companies e.g. from banks and auditors

Ability to appoint provisional liquidators

Transparency regarding a company’s affairs e.g. publicly available registers of companies

Provisions relating to corporate directors

Indemnities for directors and officers

Treatment of antecedent transactions – whether requirement of fraudulent intent

Treatment of antecedent transactions – timescale

Provisions relating to shadow directors

Provisions relating to directors’ disqualification

Other

What makes a jurisdiction attractivePerceptions of offshore centres

For complex cross-border insolvencies to work effectively and efficiently requires a fine balance between consistently applied international standards and frameworks, and being attuned to local needs and priorities. Success therefore depends on having two fundamental aspects in place in any offshore jurisdiction: a well-run court infrastructure, and clear and robust insolvency laws.

Getting the basics rightIt is rather telling that when asked to rate the most important factors for evaluating the effectiveness of a jurisdiction’s insolvency legal framework, having basic processes and provisions in place emerges as the most frequently cited factors. For the most part, participants were concerned about the feasibility of undertaking insolvency: are the right mechanisms in place to make it happen in offshore centres? Of lesser importance for respondents when evaluating offshore jurisdictions are provisions relating to corporate or shadow directors, and the treatment of antecedent transactions both in terms of timescale and whether there is a requirement for fraudulent intent.

Two-thirds (67%) of respondents place the legal process and infrastructure as their most important factor, with 84% placing it within their top three factors, see Figure 3. This is followed by the need to have an adequate and appropriate range of cross-border assistance provisions, which was placed in the top three factors by 63%, and the enforceability of foreign court orders, cited by 40%. Without these basics in place, a jurisdiction will not be perceived as a particularly appealing place to undertake insolvency.

Figure 3.

Which of the following are the three most important factors when evaluating the attractiveness of a jurisdiction’s insolvency legal framework? – Aggregated top three factors

Legal process and infrastructure is cited as one of the top three factors for evaluating the attractiveness of offshore jurisdictions by more than four out of every five respondents.


Scope for improving legal frameworks A number of research participants expressed strong views on the impact of having an adequate legal framework. As one respondent explains, a crucial difference between jurisdictions is the speed of the insolvency process: “In some jurisdictions it can take a long time to get a hearing, or one encounters a judge or a team of local lawyers who may not understand the issues. This shows that the courts do not have the infrastructure to deal with big cases.”

This is not an uncommonly expressed view. Another respondent commented. “Often the ease of undertaking proceedings has a lot to do with individual judges, the extent of their understanding of insolvency law and their experience in applying it, and the flexibility of the court to accommodate things that are urgent.” The nature and complexity of the problems now being dealt with by offshore centres no doubt contributes to this perception of lack of experience. Some of the issues coming to light as a result of the last financial crisis are new to everyone, and the judiciary are inevitably on a steep learning curve.

Performance of offshore jurisdictions seen to be inconsistentGiven the importance placed on having a reliable and well-functioning legal process and infrastructure, it is noteworthy that the current perception of the performance of offshore jurisdictions against this criterion is patchy at best. Figure 4 shows that, across all offshore jurisdictions, the average score given when evaluating legal process and infrastructure was 6.67 out of 10. That average scores for all attributes are less than seven out of 10 points to a clear scope for improvement.

Are people being overly negative? The online survey responses suggest not. The responses highlight a consistent perception of under-performance compounded by some very low scores (less than 3 out of 10) across the majority of jurisdictions. As Figure 4 shows, the best average performance scores do not always mirror the areas that respondents cite as being most important. For example, the provision of rescue mechanisms and the ability to put foreign companies into liquidation – two attributes cited among the top five most important overall when assessing what makes a jurisdiction attractive – score just 5.36 and 5.67 out of 10 respectively.

It may be that those who practise in the field of insolvency are naturally pessimistic! However, such low scores are unusual on a statistical basis.

Figure 4.

In your opinion, how effective are the insolvency legal frameworks in each jurisdiction for the following factors, on a scale where 1 is not at all effective and 10 is extremely effective?

Average effectiveness scores for offshore jurisdictions are relatively low with all attributes rated less than seven out of 10.

Factors Score

Enforceability of foreign court orders and judgments 6.75

Ability to appoint provisional liquidators 6.74

The legal process and infrastructure 6.67

Treatment of antecedent transactions – timescale 6.17

Treatment of antecedent transactions – whether requirement of fraudulent intent

6.16

Cross-border assistance provisions 6.12

Indemnities for directors and officers 5.85

Ability to put a foreign company into liquidation or other insolvency processes

5.67

Provisions relating to corporate directors 5.39

Providing rescue mechanisms for corporate financial difficulties e.g. administration and reorganisations involving courts

5.36

Provisions relating to shadow directors 5.11

Provisions relating to directors’ disqualification 4.62

Ability to obtain financial information about companies e.g. from banks and auditors

4.60

Transparency regarding a company’s affairs e.g. publicly available registers of companies

4.46

67% of respondents place the legal process and infrastructure as their most important factor, with 84% placing it within their top three factors


Cayman Islands praised for effective insolvency lawsThe second area in which we asked insolvency professionals to offer a view was which jurisdictions have the most effective insolvency laws. The Cayman Islands emerges strongly in answer to this question, with over one in four (28%) choosing it as the most effective, and almost two-thirds (63%) citing it as among the top three most effective jurisdictions, see Figure 5. Although the British Virgin Islands (BVI) lies just outside of the top five jurisdictions for first preference, it moves up to second place when top three preferences are aggregated. Almost half (48%) place the BVI in their top three jurisdictions overall.

Both the Cayman Islands and the BVI have made changes to their court systems and legal framework in recent years intended to address the issue of court resourcing by bringing on more temporary and part-time staff to help move insolvency proceedings through at a quicker rate. Changes to legislation have been noticed too, as one of our Hong Kong-based respondents explains: “I would rank Cayman Islands and the BVI above Hong Kong, because they both have improved their legislation in the time I have been working. Hong Kong hasn’t made the same improvements, but they are gradually coming through.”

Singapore: a strong performer goes unnoticed Figure 5 above shows Singapore hovering mid-table in terms of effective insolvency laws. However, when the data is analysed against where participants have had direct experience of undertaking cross-border insolvency proceedings, Singapore moves from being placed seventh overall to claim a position at the top of the table, see Figure 6. Three-quarters (75%) of respondents with direct experience in Singapore place the jurisdiction among their top three most effective, the highest of any jurisdiction. This suggests that the strong performance of Singapore may be currently under-appreciated by those who provided feedback without direct experience there. Singapore offers examples of good practice: research participants with experience in the jurisdiction comment on its efficient court system and the timeliness of judgments, usually delivered within a three month window.

What is also noteworthy about Figure 6 is the number of offshore centres that are not perceived favourably, even among participants with direct experience in that jurisdiction. Not a single research respondent with experience of undertaking proceedings in Cyprus, the Bahamas, Gibraltar, or Antigua and Barbuda rated these jurisdictions among their top three most effective offshore centres.

However, recent statutory changes could alter these perceptions in the future. For example, Cyprus has recently passed key insolvency laws, as a response to requirements for further lending by international banks. The laws affords previously non-existent protections to creditors2.

2. The Wall Street Journal, ‘Cyprus’ Parliament Passes Insolvency Laws Sought By Creditors’: http://www.wsj.com/articles/cypruss-parliament-passes-insolvency-laws-sought-by-creditors-1429377823 (2015)

Singapore

Cayman Islands

Ireland

British Virgin Islands

Hong Kong

Bermuda

Jersey

Barbados

Isle of Man

Guernsey

Cyprus

Bahamas

Gibraltar

Antigua and Barbuda

28%63%

9%48%

11%37%

18%26%

14%26%

11%22%

3%15%

3%12%

0%8%

2%3%

3%

0%3%

2%

0%0%

0%0%

Cayman Islands

Ireland

Singapore

Cyprus


Bermuda

Guernsey

Bahamas

Gibraltar

Hong Kong

Jersey

Isle of Man

Barbados

Antigua and Barbuda

Most effective jurisdictionTop three most effective jurisdictions

Figure 5.

In your opinion, which of these jurisdictions have the most effective insolvency laws?

Cayman Islands is cited by two-thirds of respondents as among their top three jurisdictions with the most effective insolvency laws.


Figure 6.

In your opinion, which of these jurisdictions have the most effective insolvency laws? – Only those with direct experience in a jurisdiction

Three-quarters of respondents with direct experience of undertaking cross-border insolvency in Singapore place it among their top three most effective jurisdictions, the highest of any major jurisdiction.

In summary The scores for offshore jurisdictions’ legal frameworks highlight the extent to which respondents believe there is more that could be done to make cross-border insolvencies work more effectively. Inadequate administrative support for judges seriously undermines their ability to deliver a high quality and timely response to users’ needs.

Although the Cayman Islands and Singapore score highly for insolvency laws that are perceived to be effective, no one jurisdiction has achieved everything perfectly. The scores are by no means uniform across the board.

Yet instead of dwelling on perceived weaknesses, it is most helpful to concentrate minds on what the most successful jurisdictions do well so these good practices can be replicated. Decisions about where to invest further in legal infrastructure and where to prioritise reform should be guided by what is proven to be of value to those who use the offshore courts system. Even where a jurisdiction is getting it right, like Singapore, there may also be a need to invest in public relations.

75%

65%

61%

59%

50%

46%

35%

33%

27%

22%

0%

0%

0%

0%

Singapore

Cayman Islands

Ireland


Hong Kong

Bermuda

Jersey

Barbados

Isle of Man

Guernsey

Cyprus

Bahamas

Gibraltar

Antigua and Barbuda

It is most helpful to concentrate minds on what the most successful jurisdictions do well so these good practices can be replicated


Instructing knowledgeable lawyers on the ground and developing strong communication and project management capabilities are two ways to ensure insolvency matters are dealt with as effectively and efficiently as possible. From a wider perspective, fostering greater collaboration between jurisdictions is necessary to address many of the systemic issues encountered when undertaking multi-jurisdictional insolvencies involving offshore centres.

The benefits of greater collaborationEnhanced collaboration can help bring about a greater level of consistency between jurisdictions. Harmonising processes and protocols can in turn help increase the efficiency and timeliness of insolvency proceedings involving increase offshore jurisdictions. This research illustrates a clear rationale for greater collaboration: increased cooperation helps to enable a more positive view of jurisdictions overall. As one UK lawyer neatly summarises: “Bringing a jurisdiction’s insolvency laws into harmony should make it a more attractive place to do business and therefore act as an incentive for the jurisdiction to sign-up.”

Take transparency of reporting as an example. As illustrated in Figure 4 on page 9, the ability to obtain financial information about companies and directors and the transparency of corporate reporting is an area in which offshore jurisdictions are currently perceived as particularly weak, scoring just 4.60 out of 10 on average. The level of disclosure of information available in the public domain differs significantly between jurisdictions. There may be local reasons why confidentiality has historically been prized, but in the current climate secrecy has become a dirty word. This is just one instance where more consistency between jurisdictions could be helpful and would help close the performance gap between the best perceived jurisdictions and the rest.

A strong desire for further cooperationAn overwhelming majority of research respondents (85%) agree that courts in different jurisdictions should collaborate more to make multi-jurisdictional insolvencies a fairer, more efficient process, see Figure 7. This compares with just 10% who believe greater collaboration is not required. This strength of feeling is echoed

Call for consistencyFostering collaboration and harmonisation

Figure 7.

Do you think that the courts in different jurisdictions should collaborate more to make multi-jurisdictional insolvencies a fairer, more efficient process?

An overwhelming majority believe that courts in different jurisdictions should collaborate more.

85% said

Yes

No

Don’t know

Yes

10%

85%

5%


by the comments of one lawyer from a ‘magic circle’ firm: “It seems at the moment that offshore jurisdictions compete with each other, they do not cooperate.” Another Cayman Islands-based lawyer was just as critical: “There has to be more trust between jurisdictions and opportunities for judges to discuss cross-border issues to build that trust.”

How can greater collaboration and harmonisation between jurisdictions be attained?When we asked leading insolvency professionals what steps they would take to foster greater collaboration we received many helpful and wide-ranging suggestions. The responses can be divided into two main groups: formal mechanisms for facilitating and mandating greater collaboration and harmonisation, and informal channels for incentivising cooperation and reciprocation. A mix of formal and informal strategies are required to ensure cross-border insolvency proceedings are geared up to deal with the realities of doing business in a globalised, interconnected economy.

Formal routes to foster collaboration and harmonisation

1. LegislationEnacting the UNCITRAL Model Law is frequently cited as an essential foundation for guaranteeing greater collaboration and consistency and avoiding protectionism. In the words of one UK-based lawyer: “I have seen instances where local courts completely ignore or flout [cross-border] insolvency regulations on the basis of local bias”. As illustrated in Figure 4 on page 9, the ability of offshore jurisdictions to recognise

foreign insolvency orders is an area of high importance for lawyers, where perceptions scores are currently low.

A formally enacted legal framework for greater cooperation finds favour with many of our research participants: “I prefer collaboration to come from legislation rather than relying on people just picking up the phone,” says one Hong Kong-based respondent.

Having effective insolvency laws may be better achieved with the incremental tweaking and passing of amendments to existing legislation rather than enacting the full model law which is in effect a regime change and requires balancing a number of competing interests. The Bahamas, for example, is amending its statutes in light of the recent Singularis decision by the Privy Council.

However, for a formalised route to work in practice it needs to be supported with greater education and guidance for judiciary to make sure they are content with the benefits (and obligations) of any formal collaboration structures.

2. Voluntary codeSome respondents believe similar outcomes can also be achieved through a voluntary rather than a statutory code. This would have the benefit of being easier and faster to implement, rather than having to rely on national parliaments to pass relevant legislation, which is not top of their agenda. One research participant puts forward the case for a voluntary code: “A voluntary code between relevant common law jurisdictions could assist practitioners by setting out what the intent of those jurisdictions is in relation to collaboration, without seeking to bind them into a UNCITRAL-type arrangement.” Yet such guidance would only be effective if adhered to, and would require consensus to get off the ground.

“ I prefer collaboration to come from legislation rather than relying on people just picking up the phone”


3. Experienced practitionersThere is currently no universal requirement for insolvency practitioners to be licensed. Licensing can address issues of quality. Jurisdictions could, as a solution, recognise the licensing processes from others jurisdictions which would remove obstacles such as the cost of setting up a local process for licensing.

4. Public policyOur respondents believe that cross-border cooperation and harmonisation can also be achieved by identifying issues of public policy and the powers courts can then give to foreign and domestic liquidators whether this is through statute or the application of the common law. This could further enhance a voluntary code as jurisdictions identify matters of public policy that apply across-borders – such as transparency.

Informal routes to foster collaboration

1. Judge to judge dialogueIn addition to legislation, less formal options for fostering collaboration are designed to address some of the underlying cultural challenges that currently inhibit greater cooperation. Many of the research participants suggest that for the judiciary to adopt a mindset of reciprocity and mutual benefit in relation to cross-border insolvency requires greater communication and information-sharing. This happens in part, but there is room for improvement: “Judges are starting to pick up the phone to one another to talk about the cross-border insolvencies that they are involved in. INSOL promotes having judges’ colloquia which provide a forum for judges to discuss such issues

and agreed protocols for better cooperation,” says one BVI-based respondent.

2. Knowledge-sharingGiven that the offshore legal communities are relatively small and well-networked this should make informal ideas sharing much easier. Sharing of soft knowledge, outside of formal colloquia or conferences, can also be hugely beneficial. From the lawyer’s perspective, being part of these conversations helps shape and influence current practice. “Knowing who other people are, how the judges work and basically what is going on in different jurisdictions is really invaluable,” says a senior lawyer at a large UK firm.

In summary Greater cooperation has the potential to bring significant, mutually-beneficial outcomes to the way cross-border insolvency proceedings are undertaken in offshore jurisdictions. Formal structures are important for enshrining good practice and ensuring minimum standards. Yet lawyers and judges should not need to rely on formal mechanisms alone. It is clear from our research that people think more can be done to foster a mindset of openness, reciprocity and collaboration.

Over the coming months and years we will likely see more change in this area. Offshore jurisdictions are coming under greater scrutiny from the media and from lawmakers in other countries. This adds further pressure to be more transparent and cooperative, in order to remain a competitive and attractive jurisdiction for the long-term.

Figure 8.

How do you think greater collaboration can be obtained?

The size of the words and phrases in the word cloud indicates the frequency with which it is mentioned by participants.

UNCITRAL Model Lawcommunication

enactment of Model Law

efficient searchable public insolvency registerfrequent meetings and symposiums

legislation harmonise/standardise insolvency lawsinternational treaties

experienced practitioners judicial oversight of processes

common standards across model laws lobbying

mutual recognition of offices

cross-border insolvency agreements

political consensus

Judge to Judge dialogue INSOLprotocols

international judicial conferences

reciprocal enforcementrecognition of foreign insolvency order

trust

voluntary code between relevant common law jurisdictions

“ Knowing who other people are, how the judges work and basically what is going on in different jurisdictions is really invaluable”


To what extent is it possible to overcome these challenges highlighted in this research when undertaking cross-border insolvency proceedings in offshore jurisdictions? The consensus view from research participants is that it is possible to work around the idiosyncrasies of operating in different offshore jurisdictions through a focus on superior project management and by instructing good local lawyers. Both are critical for the smooth running of insolvency proceedings.

According to one respondent with many years of experience conducting insolvency in offshore jurisdictions in the Caribbean: “When working in offshore jurisdictions there will be surprising things in terms of the infrastructure of local law that just take you aback. My advice would be to instruct the best lawyers locally and to insist on frequent dialogue with them. Good communication to keep everybody up to speed will ensure things run as smoothly as possible.”

But what about tackling some of the systemic issues head on? We hope this research will be a catalyst for a wider debate about the most effective way to conduct cross-border insolvencies now and in the future.

ConclusionsQuestions and discussion points arising from our research

What can be learned from the jurisdictions that are currently perceived to be ahead?

5

We offer a series of questions to launch that debate:

Where are the greatest opportunities to enhance collaboration with different jurisdictions?

4

What actions are needed to address the low perception scores among the legal community of offshore jurisdictions?

3

To what extent are the basics – an effective legal process and a range of insolvency provisions – in place and fit for purpose?

2

How prepared is the legal framework and court infrastructure to meet and anticipate a rise in insolvency cases?

1

We would greatly welcome your views whether you have already taken part in the research or not. Please get in touch.


The following pages take a deeper dive into the perception of eight leading offshore jurisdictions: Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Hong Kong, Ireland, Isle of Man and Jersey. For each jurisdiction of which they had direct experience, research participants were asked to score performance, and average scores are provided for the eight jurisdictions based on their legal court infrastructure, listing process and timeliness of enforcing judgments. Alongside these scores is a selection of comments illustrating expert insights and perceptions about undertaking insolvency proceedings in each jurisdiction.

Benchmarking cross-border insolvencyA snapshot of perceptions of eight leading offshore jurisdictions


Jurisdiction Court infrastructure Listing process Timeliness of enforcing judgments

Score ( ⁄ 10) Rank Score ( ⁄ 10) Rank Score ( ⁄ 10) Rank

Bermuda

6.94 5th 6.47 3rd 7.00 5th


6.58 7th 6.22 7th 6.96 7th

Cayman Islands

6.86 6th 5.76 8th 6.97 6th

Guernsey

6.54 7th 6.42 4th 6.50 8th

Hong Kong

7.09 4th 6.40 6th 7.30 4th

Ireland

7.82 1st 6.44 4th 7.44 2nd

Isle of Man

7.73 2nd 7.33 1st 7.70 1st

Jersey

7.39 3rd 6.82 2nd 7.40 3rd


Bermuda: A greater ability to wind-up companies is needed

The efficiency of the Bermuda courts is cited as a particular strength by respondents:

• “ In my experience in Bermuda, I have found the court to be pretty efficient. I think they are just struggling with outdated laws.”

However, the consensus opinion is that Bermuda’s legislation needs to be updated, particularly to allow the winding up of foreign companies:

• “ An ability to wind up foreign companies is currently lacking.”

• “ Bermuda now needs statutory provision for the winding up of foreign companies and provisions for judicial assistance to foreign liquidators equivalent to s426 of the UK Companies Act.”

As a result of recent cases and rulings of the Privy Council, many lawyers would encourage legislative action as a priority:

• “ I think they need to consider a recognition process which is statutory rather than relying entirely on the common law, particularly now that the Judicial Committee of the Privy Council has made its ruling in the Saad and Singularis cases.”

• “ Bermuda’s legislation is fairly archaic, but we make it work. However, other jurisdictions have sought to modernise their legislation. Proposals have been put forward in the past but it has not been high on the Government’s agenda. Given recent decisions in the Privy Council, there needs to be further change in our legislation.”

On a practical level some respondents say they struggle with basic processes such as listing cases in Bermuda:

• “ It would be a great help if they could invest in a better court website with up-to-date contact and listing information.”

• “ Bermuda would benefit from online filing and docketing, much like the current US system.”

British Virgin Islands: Strong call to give force to the UNCITRAL Model Law

As a jurisdiction the BVI scores for legal process and court infrastructure are all below seven out of 10, which according to some respondents could be due to a potential resource issue:

• “ There is a lack of available resources for the BVI practitioners.”

Many respondents point to difficulties associated with the lack of cross-border provisions. If this issue could be addressed and provisions properly enacted, it would make the BVI a much more attractive place to undertake multi-jurisdictional insolvencies:

• “ BVI needs to bring the administration provisions into force from the Insolvency Act 2003.”

• “ Whilst BVI has adopted the UNCITRAL Model Law, it has yet to be enacted and this clearly should happen as soon as possible.”

• “ BVI should allow non-resident liquidators to liquidate BVI companies and file documents without the need for resident liquidators.”

Respondents point to outstanding issues around the disqualification of directors that need to be addressed:

• “ Although director disqualification provisions are in place, BVI’s Financial Services Commission needs to set up a department to actually review these reports and disqualify directors. As matters stand no department has been set up and no BVI director has ever been disqualified.”

However, it is recognised that efforts have been made to foster collaboration, and these should be extended further:

• “ BVI’s obligation outlines that it will ‘cooperate to the maximum extent possible’ with foreign courts or representatives from foreign countries ‘designated’ by statutory instrument. It would be helpful if they could increase this list of designated countries.”


Cayman Islands: Listing process and speed of court system are concerns

The Cayman Islands scores well for cross-border insolvency legislative provisions (see Figure 5 on page 10):

• “ Cayman Islands legislation is a bit more comprehensive than Bermuda’s. For example, Cayman has provisions for the winding up of foreign companies, which Bermuda doesn’t have. They also have legislation for the winding up of partnerships, which Bermuda doesn’t have. The insolvency legislation is among the most developed of all the offshore centres I have experienced.”

However the speed and responsiveness of court infrastructure and legal judgments is an area identified for review:

• “ Cayman should speed up the delivery of judgments. It would also benefit from a more streamlined and standardised process for listing hearings for parties to communicate with the court. They need to make more court dates available and deal with summonses more quickly.”

Access to information is one area where greater transparency would help with cross-border insolvency matters:

• “ The ability to obtain documents and information from auditors and persons in general who have information relevant to the business and affairs of the company remains a challenge. With the increase of wealthy individuals using cross-border structures, the recognition legislation should be extended to personal bankruptcy and all aspects of the ancillary relief should be made available.”

Guernsey: A dedicated companies court would be well-received

Our respondents offer mixed views about the experience of undertaking insolvency in Guernsey. Some point to the lack of insolvency specialism at the court level as a drawback:

• “ A dedicated companies court rather than the bi-weekly general list would make the process more efficient.”

• “ The system is very burdensome because obtaining court orders requires lengthy planning involving non-lawyer laymen making key decisions. As a result the system is less transparent and understandable than it could be.”

• “ Guernsey should look at updating the Saisie and Désastre laws to make it clearer how they relate to the insolvency provision in the company law.”

The consensus among our research participants is that undertaking insolvency in Guernsey is time-consuming and costly:

• “ In my experience judgments take an extremely long time, which is a real problem.”

• “ Administration should be made less costly: all too often the cost of the operation endangers the patient’s life. Schemes of arrangement are far too law-driven and costly at present.”

However, it is acknowledged that there is work under way to address many of these issues:

• “ There is a committee in place considering legislative reform. This will further improve the range of rescue solutions and provide greater certainty and insolvency processes, including regularising pre-packs that can happen without any formal processes being in place.”


Hong Kong: Greater clarity over rescue procedures is required and judiciary vacancies are slowing down processes

Based on the scores given by our respondents for its legal process and court infrastructure, Hong Kong places consistently mid-table among our group of eight jurisdictions. It is generally thought that Hong Kong courts are experienced in dealing with cross-border matters:

• “ We have a lot of insolvencies involving companies based in Hong Kong. In my experience dealing with dual proceedings in Hong Kong and Bermuda generally works pretty well. The Hong Kong courts are fairly responsive to cross-border issues.”

• “ I think the standard of the bar and the law firms that deal with insolvency work in Hong Kong is pretty high, and the standard of the insolvency practitioner profession is high too.”

• “ My experience has been positive, but I have noticed that the wait for hearing dates can often be long. This can only be addressed by appointing more judges because a number of posts are currently unfilled.”

Adopting the UNCITRAL Model Law and introducing a wider range of rescue mechanisms would help increase Hong Kong’s favourability ratings further:

• “ Hong Kong needs to introduce a rescue procedure and clarify the use of provisional liquidations as a rescue procedure, perhaps drawing on the best things of the Cayman Islands approach.”

• “ The actual enactment of the Provisional Supervision regime, which has been in the pipeline since 1998, has never made it to legislation. Adopting the UNCITRAL Model Law or other cross-border insolvency frameworks would be a major benefit, as would the introduction of wrongful trading and the improvement of laws relating to antecedent transactions.”

Greater harmonisation of Hong Kong’s rules and procedures with other offshore centres would give lawyers greater confidence and certainty:

• “ Hong Kong should make the process for commencing and the process for winding-up and bankruptcy application less esoteric. For cross-border matters, more certainty is required.”

However, our respondents recognise there is much activity underway by the Hong Kong authorities to review existing arrangements and implement improvements:

• “ It is anticipated that a new draft Insolvency Ordinance will be introduced before the legislature in 2015. This is expected to provide for a corporate rescue procedure analogous to administration or Chapter 11, which is conspicuous by its absence from the current regime.”

• “ Hong Kong legislation leaves a lot to be desired. It is currently having a re-write, but one barrier is the lack of legislative time. The other issue is that Hong Kong is not a country but a province, and so the issue of extra-territoriality is something that needs to be considered.”


Ireland: More availability of judges is required, particularly for appeals

Ireland benchmarks well against other offshore jurisdictions for its legal process and court infrastructure. However, research participants still cite areas for improvement, particularly around the appeals process:

• “ The courts should look again at the availability of judges to deal with cases to allow a quicker throughput of appeals. Although this is being worked on, Ireland would also benefit from signing up to UNCITRAL Model Law.”

By reviewing its protocols for court attendance by liquidators, Ireland could further increase the perception that it is a highly efficient and cost-effective place to undertake insolvency:

• “ The court liquidation process could be made more cost-effective. It would be more user-friendly to have a more informal lodging process of reports by liquidators, without the need for forcing court attendance. By filing regular reports, queries could be raised by correspondence from the Examiner’s Office. If any issues do arise, court attendance by the liquidator could be requested.”

Jersey: Clear demand to introduce a new insolvency regime

When asked to rate its legal process and court infrastructure, our respondents place Jersey among the top three jurisdictions. However, scores for other aspects of its cross-border insolvency regime show Jersey still has room for improvement and modernisation:

• “ Certain aspects of the insolvency system are somewhat outdated and would benefit from modernisation, including the range of insolvency and non-insolvency options available.”

• “ The introduction of a commercial court judge would be useful. The Cause de Brièveté process is effective but underused, often because of the reluctance of the court to streamline cases.”

• “ The enforcement of security over movables has been brought up to date, but the enforcement over immovable property is very slow and the procedure archaic.”

Introducing a wider range of mechanisms for insolvency would help bring Jersey in line with the most advanced jurisdictions:

• “ Introducing a creditor instigated winding-up process and rules permitting IPs to be appointed instead of the Viscount on a Désastre application would have clear benefit.”

• “ Abolish Désastre, or make it more workable and cost-effective. Jersey should consider introducing an administration-like procedure.”

• “ I believe there is scope to introduce a rescue regime while still preserving secured-creditor priority.”

Isle of Man: Court infrastructure is well-received but the insolvency laws less so

Like Ireland, Isle of Man currently has a favourable reputation for having an effective legal process and court infrastructure:

• “ Recent experience of the courts in the Isle of Man on a couple of cases has been very positive.”

However, areas for improvement are also cited:

• “ Isle of Man needs to revise its laws in relation to antecedent transactions, and introduce an administration procedure.”


About the researchGrant Thornton UK LLP and South Square commissioned independent consultancy Meridian West to conduct research among solicitors, barristers and other insolvency professionals with experience of conducting multi-jurisdictional insolvencies involving offshore jurisdictions. In total 81 people took part in the online research, together representing views from 50 of the leading firms involved in cross-border insolvency. This online research was supported by a series of in-depth interviews.

Research participants are based around the world and have direct experience of undertaking cross-border insolvency in multiple jurisdictions including Cayman Islands, BVI, Jersey and Bermuda among others, see Figure 9 below for more details.

Figure 9.

In which of the following jurisdictions do you have experience of insolvency proceedings?

Research participants have experience undertaking cross-border insolvency in a range of different offshore jurisdictions.

53%

42%

32%

30%

22%

22%

20%

19%

10%

7%

5%

5%

5%

4%

Cayman Islands


Jersey

Bermuda

Ireland

Guernsey

Hong Kong

Isle of Man

Singapore

Bahamas

Antigua and Barbuda

Cyprus

Gibraltar

Barbados

About Grant Thornton International LtdGrant Thornton International Ltd is one of the world’s leading organisations of independent assurance, tax and advisory firms. Over 38,500 Grant Thornton people, across 120 countries, are focused on making a difference to clients, colleagues and the communities in which we live and work. Cross-border insolvency assignments are supported by member firms with dedicated teams operating across all of the major Offshore Financial Centres, supported by a specialist practice in London who are experienced in a wide range of jurisdictions.

www.grantthornton.com

About South SquareSouth Square is ranked as the leading set in England and Wales for domestic and international insolvency. South Square barristers have acted in many of the most important insolvency, restructuring, banking, commercial, company and fraud-related disputes of recent times. Our world-class reputation extends beyond England and Wales, with barristers regularly appearing in courts and tribunals in all major offshore jurisdictions. Recent feedback in the Bar Guides includes: “The best set at the Bar for insolvency” (Legal 500) and “an unbeatable repository of specialist insolvency advisors and advocates” (Chambers UK).

www.southsquare.com

Joanna ColtonSouth [email protected]

Charlotte DevlinGrant Thornton UK [email protected]

For more information about the research and to join the debate, contact:

© Copyright Grant Thornton UK LLP and South Square 2015

Documents

From discord to harmony: the future of cross-border insolvency · activity in the financial services sector. Jurisdictions need to ensure their basic legal process and infrastructure