European Perspective: Stanford, Liquidations And The Serious Fraud Office

In relation to insolvent liquidations under U.K. law, one of the primary objectives will be the implementation of an efficient process to preserve and recover assets for the benefit of the creditors. This is particularly so where there is a need to instigate costly litigation or cross-border recognition proceedings and where the liquidator will want increased assurances as to the likelihood that those steps will generate positive returns. Difficulties can arise, however, where—as is often the case when fraud has contributed to the insolvency—criminal investigations are being conducted in parallel to the liquidation proceedings. In those circumstances, the criminal process is often afforded a priority, which can have a prejudicial effect on civil recovery actions and the liquidation process generally. In this article, we take a brief look at the interaction between insolvency and criminal proceedings in the context of the recent decision of the U.K. Court of Appeal in Re Stanford International Bank Ltd (In Liquidation) [2010] EWCA Civ 137.

COMPETING STEPS BY THE SERIOUS FRAUD OFFICE

Suppose an English company, "Trading Limited," is wound up by an order of the English Courts. On appointment, the liquidators discover that substantially all of the assets of Trading Limited are in the form of deposits with banks situated in England. But what if evidence is then uncovered which suggests that Trading Limited has been used as a vehicle for money laundering, such that there are grounds to believe that the bank accounts in question have received proceeds of crime? In those circumstances, the liquidator may well ask himself whether his efforts to recover assets for the benefit of the general body of creditors could be prejudiced by steps taken by the Serious Fraud Office ("SFO") to take control of the tainted funds.

Before addressing this issue, it is first necessary to consider the types of orders that can be granted to the SFO (or other relevant prosecutors) by the English Criminal Courts.

1. Domestic Restraint Order: Akin to a civil freezing injunction, an English restraint order—granted pursuant to s.41 of the Proceeds of Crime Act 2002 ("POCA 2002")—is an anticipatory and protective measure designed for the purpose of "prohibiting any specified person from dealing with any realisable property held by him" (s.41.1) with a view to preserving assets against the possibility of a future confiscation order (discussed below). The specified person need not be an actual or potential defendant. To obtain a restraint order, the SFO must be able to demonstrate that, without it, there is a reasonable chance that the property would be dissipated (this may be inferred from the circumstances of the alleged offence) and that one of the statutory conditions has been met. These conditions include showing that a criminal investigation has been started in England and Wales and that there is reasonable cause to believe that the alleged defendant has benefited from his criminal conduct.

2. External Restraint Order ("ERO"): This is a restraint order applied for by the SFO following receipt of a request for assistance from an overseas authority (for example, the U.S. Department of Justice). The jurisdiction to grant an ERO is founded in s.444 of POCA 2002, as exercised by the Proceeds of Crime Act 2002 (External Requests and Orders) Order 2005 SI No: 3181 (the "ERO Act"). In cases involving external requests for the restraint of identified property, what matters is whether the foreign jurisdiction may make an order in relation to the property in question, so that there are reasonable grounds for believing that an ERO may be needed to satisfy a foreign confiscation order.

3. Confiscation Order: Once a defendant is convicted of a criminal offence, the prosecutor or the court may...