Navigating Complexity

18 December 2020

The article is published in The Ukrainian Journal of Business Law

Asset recovery litigation became truly internationalized as business preferred to hold assets across multiple jurisdictions. Arisen conflicts and fraud provide a huge challenge for getting access to justice and enforcing awards.

We have invited James Hart and Serhii Nyzhnyi, partners of Hillmont Partners, to discuss the process and effective strategies of asset recovery in Ukrainian realities, essential legal tools in key jurisdictions, their experience in navigating complex cross-border matters, as well as the prospects of third-party litigation

UJBL: As we are aware, Hillmont Partners specializes in asset recovery. Is this legal offering a part of the firm’s development strategy or just a temporary response to client legal needs?

James Hart (J. H.): Developing and executing a cost effective and expeditious route to recovering assets has definitely become one of the core competences of Hillmont. We have been developing this capability since day one while working on cases of domestic litigation that had no end in sight without moving offshore to the realm of shell companies, trusts and nominees. We made it a central pillar of our strategy to enhance our capabilities in recovering assets for victims
of large-scale and complex fraud by building a global network of experienced and razor-sharp litigators and investigators who understand the dishonest tactics employed by international fraudsters. The key to our success is being able to bring in the right professionals in the right jurisdictions at a stage when there is sight only of the tip of the iceberg. I feel this part of our business also gives us a sense of purpose. We all want Ukraine to be successful and prosperous; however, its reputation as an environment where oligarchic power and corruption reign supreme has held back investment into the country and is the number one barrier to its success. Every dollar returned to an investor is a step towards rebuilding faith in Ukraine’s growth and investment narrative.

Serhii Nyzhnyi (S. N.): Having suffered a loss caused by fraud, clients are faced with the prospect of throwing good money after bad, perhaps ordering expensive asset tracing reports in the hope that they may provide a shortcut to recovery. Sadly, such reports rarely provide that shortcut and on their own do not go a long way to opening up a pathway to recovery. Publicly available information of course serves a purpose in recovery strategies, but without legally accessing non-public records through disclosure orders and bankruptcy proceedings you are unlikely to see the wood for the trees in an opaque laundromat. A vital tool for providing access to justice in these circumstances is third-party litigation funding. Litigation funds provide the resources necessary to fund a cross-border litigation,
arbitration or asset recovery out of the proceeds of recovery on a non-recourse basis, which can be vital for victims of fraud that understandably do not want to extend their potential losses.

UJBL: What is the trend in respect of instances of fraud in Ukraine? Has it been affected by COVID-19 and lockdown?

S. N.: Lockdown has provided a respite for fraudsters. Obtaining court listings across most jurisdictions is becoming harder and harder as the backlog at courts grows. Covid has also disrupted the operations of many law firms and other advisors. Response times are slower and this inevitably harms the prospects of recovery to some extent. We have a team and a network of partners that are doubling their efforts to minimise the impact of these developments. Delays are inevitable, but this will be no more than a respite for our clients’ opponents thanks to the hard work and determination of our team.

J. H.: Covid is not only a health crisis, but an economic crisis, the effects of which will cause businesses to fail and delinquencies to rise. This is a fertile breeding ground for fraud. Businesses and investors must therefore take extra care in structuring any deal, venture or investment. Due diligence and legal intelligence have never been more important.

UJBL: Is there any typical fraud case or is each case unique?

S. N.: Hillmont Partners specializes in dealing with the most sophisticated criminal and civil fraud cases that often already have a long history. Although each case is unique there is a common theme to most frauds in terms of transactions, jurisdictions and holding structures. The emergence of cryptocurrencies is further сomplicating the task of fighting fraud and recovering assets and requires us to broaden the application of the typical tools we use. Freezing, disclosure and search orders over cryptocurrency assets in offshore jurisdictions are going to become more commonplace.

J. H.: Sadly, a large part of our work is advising victims of criminal fraud that has taken place in Ukraine. The Ukrainian criminal and civil codes are not fit for purpose in many such circumstances due to numerous loopholes (for example, the Law on Mutual Investment Institutions, which fails to establish a proper duty of care and good faith for investment managers in respect of investors) require either imperfect approaches that create a frozen conflict in a country, such as obtaining asset seizures, or remedies obtained in other jurisdictions. Ultimately, domestic actions to freeze assets in civil and criminal proceedings do work as they can force a negotiated settlement. However, a negotiated settlement in the event of fraud is not a fair outcome because the fraudster still enjoys some of the fruits of their scheme. One long-term solution is to reform the Civil Code such that the standard of proof becomes a reasonable and realistic threshold. I think it is difficult to exaggerate the extent to which this would contribute to Ukraine’s economic growth prospects as the confidence of investors would soar once they understand
there is a framework that protects them.

UJBL: What is the particular role of an advisor when deciding on the asset recovery strategy for a client? Are there any specific requirements for project and team management to lead a complex recovery case?

J. H.: I risk stating the obvious, but a legal advisor’s responsibility is to develop and implement an effective and efficient asset recovery strategy, which will minimise the client’s costs and will maximise the probability that assets will be returned. In a cross-border recovery the starting point is really nailing down the evidence and identifying the jurisdictions that are in play and the actors in the fraud. In our experience the most effective strategy establishes jurisdiction in a common law system and clearly lays bare the culpability of third parties who have a lot to lose. Financial institutions, legal advisors, accountants and directors can all find themselves in the crosshairs if they have facilitated a fraud. If the evidence is not strong enough to begin with then tools such as Norwich Pharmacal Orders and Section 1782 applications in the US may be necessary. Without a strong team of forensic accountants these tools are of little use, so choosing the right team is vital.

S. N.: In terms of specific requirements for project and team management, to achieve the best result the legal team should consist of legal experts with the relevant background and versatile legal experience. For instance, our commercial dispute resolution team and white-collar crime practices include former investigators, judges and lawyers who have worked in large international law firms. Such a combination of expertise allows us to find out-ofthe-box solutions when working on a new case. The team leader must also be a very strong manager given he or she must not only manage the team internally, but also ensure efficient communication with counsel in multiple jurisdictions, investigators and forensic accountants. Given the scale of these cases, managing the flow of information can make or break a case. There is a common perception that asset recovery cases may last for years, and it is quite demotivating for clients.

UJBL: What kind of strategies could be enforced to preserve reasonable timelines?

S. N.: This is true and it is demotivating. At the outset of any case we start with the objectives of the client. Is the goal total victory or a recovery of a portion of lost assets? A full recovery is, of course, always a preference, but we have to be as clear as possible from the start about the costbenefit of various strategies. For instance,
in some circumstances it may make sense to look for a quick win by commencing and pursuing domestic criminal proceedings, which cause a fraudster to seek a negotiated settlement. In other cases there may be economic sense in pursuing a more costly and time-consuming strategy.

J. H.: If you have enough evidence from the beginning you can make life extremely uncomfortable for debtors within months. Worldwide freezing orders and proprietary injunctions make defendants sit up immediately. The appointment of receivers in key operating companies can also lead to an urgency to settle on the part of a debtor. However, the costs of these actions are normally substantial and that is why Serhii’s point about starting with objectives is so important. Third-party funding and the sale of claims are also vital options if a client does not wish to invest into a long recovery process should a short and sharp strategy prove impossible. In which jurisdictions do you have asset recoveries? Please explain why.

J. H.: So far, we have been involved in asset recoveries in Switzerland, England, the United States, Cyprus, BVI, Poland, Moldova, the Baltics, Liechtenstein, Panama, the Netherlands and Israel. We are led to these jurisdictions because, on the face of it, some of them provide the perfect sheltered environment for those seeking to shirk their obligations. Mixing them together is often considered the most effective approach. For example, setting up a UK LP with bank accounts in some backwater. However, some of these jurisdictions are somewhat paradoxical in nature. The UK, for example, has a very liberal regime in terms of establishing a company and statutory reporting, while also providing claimants and creditors with powerful courtgranted remedies. One effective measure in a Ukrainian context is to challenge sham contracts with UK companies under Section 423 of the UK Insolvency Act (transactions defrauding creditors).

UJBL: What are the types of clients you would refrain from working with?

S. N.: To avoid spouting generalities about ethical standards and zero-tolerance to corrupt practices, which are a given in our firm, I would rather point to the types
of clients with whom we do work. Most of our clients are international and many are listed on stock exchanges across the world. They require us to act professionally and lawfully. Sadly, unlawful court decisions in Ukraine can still be obtained with a bag of cash and that, of course, complicates our work. However, we manage to successfully and lawfully defend our clients’ interests by knowing more than our client’s opponents and hiring stellar legal minds.

J. H.: I can understand why a claimant being denied justice would be tempted to attempt to fight corruption with corruption. But we refuse to take shortcuts and will not accept instruction from a client that expects us to.

UJBL: What should a business owner do first thing when he or she discovers about being defrauded?

J. H.: Generally speaking, you should act fast. Collect as much evidence as you can — messages, documents, meeting notes — and share it with your lawyer. Your lawyer should assess the strength of the evidence and identify missing links. Make sure you establish clear goals from the beginning: the budget, the critical path (injunctive relief to preserve assets, settlement prospects, discovery, grounds and jurisdictions for the substantive claim), the expected recovery, etc.

S. N.: If we are talking about protecting against asset dissipation in Ukraine, civil and commercial seizures could be obtained in a rather simpler manner than criminal arrests. However, the former can more simply be lifted by a court. A criminal seizure is based on an investigator’s or prosecutor’s motion and normally it is lifted only when the criminal investigation is over (which, in view of the Ukrainian law-enforcement system realities, may take up to several years).

UJBL: What do you think of the Ukrainian judicial system? Is it effective in asset recovery cases?

S. N.: In Ukraine there is a low level of trust in judges and the judiciary as a whole. In 2020, the judicial system is trusted by a mere 13% of citizens and since 2013 this level of support has averaged a mere 5-7%. In my opinion, the ongoing corruption scandals and regular, clear dishonest judgments are the main reason for such mistrust. The recent decision of the Constitutional Court of Ukraine to invalidate crucial anticorruption legislation is just the latest example.
Moreover, the national courts, that according to Transparency International are short of about 2,500 judges to be at capacity, suffer from a huge caseload that lead so massive delays. It is absurd that some civil district courts of Kyiv have only 6-8 acting judges. Therefore, before going to a court we will consider all possible options of pretrial dispute resolution and will consider domestic litigation if all other options are exhausted.

J. H.: Our foreign clients understandably view the Ukrainian judicial system as a swamp and this is the number one reason why they are reluctant to invest in the
country. The situation has improved since I first moved to Ukraine 10 years ago, but Ukraine will tragically continue to underperform until judicial reform is complete and fraudster-friendly legal loopholes are closed. This process will take years, but just a positive trend will attract investment. I am regularly asked by investment funds about this trend because investment decisions do depend on it.

UJBL: What are the prospects for thirdparty funding in asset recovery cases? How does it work in foreign practice?

J. H.: We have noticed that over the last few years litigation funds have started to become more interested in litigations involving Ukrainian citizens and funds or assets with their origins in Ukraine. Funding is particularly attractive in cases where a client does not feel able to judge the probability of success of a claim
or does not have the resources to pursue a claim given that the financial risk of the litigation is removed from the claimant’s balance sheet and transferred to that of the funder. We have recently raised GBP 14 million worth of litigation funding to pursue tort and arbitration claims both for single and collective claimants. There is also great interest from alternative investment managers seeking to enter the litigation funding market and funding emerging market litigation. When funding litigation involving common law jurisdictions such as England and Wales, it is vital to take structuring advice to ensure a claim cannot be attacked on the grounds of maintenance and champerty (centuries old legal concepts that sought to eliminate the commercialization of litigation).

UJBL: Is it a common practice that one or several criminal cases accompany an asset recovery case?

S. N.: Absolutely. Criminal cases in Ukraine can support civil proceedings outside Ukraine in two key ways. Firstly, they can preserve the status quo through criminal seizures, which we have already mentioned. Secondly, they can result in vital additional evidence that can be crucial in civil proceedings. This is why our commercial litigation department works so closely with our white-collar crime team, and this comes back to the point made earlier about the importance of managing the flow of information in complex international cases.

UJBL: Will you continue growing capacity in asset recovery? What are your core values in talent recruitment and team development?

J. H.: We expect the demand for the services of this practice to increase in the coming year. We are growing fast in terms of workload and our assignments are becoming larger and more complicated with each new mandate. Our goal is moderate but steady team growth. The level of concentration that is required every day to succeed at the job is very high. Thus, we compete for the best talent in the market.

S. N.: We are well prepared to extend our expertise and resources with new joiners at all levels. Our perfect candidate must demonstrate ethical integrity, respect, independent thinking, collaboration and kindness. When you are expecting a team to work long hours and over weekends to meet critical deadlines you have to foster a culture of openness and intellectual curiosity. Our different backgrounds, experiences, world views and expertise make us savvier problem solvers and drive better results.