The Use Of Sealing And Gagging Relief In Complex Insolvency Proceedings Involving The Investigation Of Fraud And Discovery Of Hidden Assets

Fraud and insolvency can be vexing. However, there are a number

of tools available to an insolvency professional who is faced with

an insolvent estate that has been made the victim of grand

malfeasance or fraud. In the context of such an insolvency, the

discovery and preservation of concealed assets linked to an estate

is the focal point of the entire process. In general terms a

Liquidator (or other insolvency officeholder) is vested with broad

powers that can be exercised towards the achievement of that

objective. The focus of this paper is on the use of certain

extraordinary ex-parte measures to locate the fructus

sceleris (the fruits of fraud) optimally. The concealed asset

discovery remedies described in this paper are available in most

British Commonwealth jurisdictions and in some jurisdictions in the

United States.

This paper considers ex-parte relief in the context of

the appointment of a provisional Liquidator, and also assumes that

the insolvency in question is one that involves a number of

jurisdictions. This article emphasizes the use of 'gagging'

and 'sealing' relief1 in support of

multi-jurisdictional asset location investigations. While some

reference to Norwich Pharmacal/Bankers Trust document

discovery and asset Freezing Orders must of necessity be included,

an in depth discussion of such reliefs2 is beyond the

scope of this article. 'Following' or 'tracing'

misappropriated value down multiple paths of transactions or

transfers, cannot usually be accomplished effectively in the

absence of the protection of utmost secrecy surrounding the

investigation. Sealing and gagging orders are, in effect,

judicially imposed secrecy orders. They require the Court's

staff to prohibit public access to the Court's record of the

proceeding involved. This is the "Sealing Order." A gag

on the other hand is an injunction imposed on any person with

knowledge of either 'sealed' proceedings generally or,

sometimes more specifically, an order compelling the disclosure of

confidential documents, from tipping-off any third party of the

same. It is thus sometimes also referred to as an 'anti-tip-off

Order.'

The starting point in any analysis of the means available to a

Liquidator to achieve the objectives of the appointment is the

Order appointing the Liquidator. Thus the drafting of the initial

Order appointing the Liquidator is of paramount importance.

Thoughtful drafting can ensure that the Order can encompass a broad

scope of powers or entitlements that may not have originally been

contemplated. However, caution is also appropriate at this time,

given that in the multi-jurisdictional context the foreign

officeholder will of necessity require recognition in a foreign

jurisdiction before he can hope to exercise any powers there. As

the reader will no doubt be aware-recognition by a foreign Court is

predicated upon acceptance of the powers bestowed in the initial

appointing document.3

It is a general principle of the English common law that the

dissolution or liquidation of a company by an order of a court

located in its place of incorporation will be recognised by an

English Court.4 This general rule of the common law is

subject to the proviso that the appointment of the Liquidator in

question is not contrary to English public policy, and in

particular that such has not been procured by fraud. This

traditional principle is also now the subject of significant change

through the relatively recent introduction of the concept of a

company's 'centre of main interests' – or its

C.O.M.I. – both within the EU and in jurisdictions which

have adopted the UNCITRAL Model Law on Cross-Border Insolvency

(1997). In addition, where the Order appointing a Liquidator

contains provisions enabling him to act in ways that would be

considered outside the scope of a Liquidator's powers in a

foreign jurisdiction, the foreign Court is unlikely to recognise

the appointment absent appropriate concessions or

acknowledgements.

Given the focus of this paper one of the most important

considerations in seeking the assistance of a foreign Court, is

whether the jurisdiction of that Court facilitates Liquidators by

making available ex-parte procedures designed to uncover

information under the protection of ancillary secrecy orders

– such as sealing or gagging injunctions. If the actual

insolvency code or body of legislation involved does not

specifically provide for the use of ex-parte investigative

procedures by a Liquidator or other such official, recourse may

– in most in Anglo American jurisdictions – be

had to the rules of civil procedure. Most common law Courts have

jurisdiction to hear a variety of applications without notice, and

in general one can appeal to the inherent jurisdiction of a Court

to do as it sees fit to ensure that the ends of justice are met. In

general it may be said that the common law jurisdictions,

including, for instance, the United States, England & Wales and

Australia, provide for broad reliefs in such context.5

In contrast, civil law jurisdictions in general do not countenance

such relief. However, in the intellectual property context, E.U.

Directive 2004/48/EC is to change that stance. Under this

Directive, the basic principles of the Norwich

Pharmacal/Bankers Trust document disclosure

jurisdiction6 are ostensibly to be implemented into the

national law of the member states of the European Union regardless

of whether they belong to the Anglo-Saxon or the Civil Law legal

traditions. The Directive has been widely criticized given its

introduction of hitherto common law centric draconian measures.

This is arguably one of the reasons that its implementation

throughout the EU is well beyond schedule. As of January 1, 2008

the Directive will be implemented in German law such that the third

party, Norwich Pharmacal/Bankers Trust document disclosure

jurisdiction in respect of intellectual property matters is now

afforded recognition in Germany. However, there is no provision

made for ancillary sealing and gagging relief. It remains to be

seen how this Directive will be implemented in practice in the

various EU jurisdictions.7 The fact that such a

Directive has been issued however must at least be viewed as a step

towards recognition of the utility of such procedures in locating

and preserving property or valuable information, albeit in this

case intellectual property.

Most common law jurisdictions specifically provide that certain

proceedings may be held in camera. However, where that

power is not specifically provided for, the Court's inherent

jurisdiction can always be appealed to. In effect a Court has power

to hear any matter or proceeding (or any part thereof) in

camera if it is satisfied that it is expedient, in the

interests of justice, or for other good and sufficient reason to do

so. Such reasons might include for example, the need to undertake

measures intended to combat fraud, uphold public security, or

indeed simply to protect confidential or proprietary information.

Secrecy orders are often used in the context of trade secrets

litigation, by way of illustration. They are also frequently used

in litigation involving minors and the family.

In addition, the Court's inherent jurisdiction can also be

appealed to in the context of seeking sealing and gagging relief.

Again this derives from the Court's inherent power to make any

Order necessary to enable it to act effectively. Support for this

contention can be found in the case of R v. Connolly

[1964] AC 1254, where the Court said:-

"There can be no doubt that a Court which is endowed

with a particular jurisdiction has powers which are necessary to

enable it to act effectively within such a...