Asset Tracing In International Arbitration

There is little point in commencing international arbitration proceedings if recovery on the resulting award will be impossible. Hiring an asset tracing firm may help reduce the risk of arbitration proceedings being in vain. Asset tracing involves a thorough examination of financial records, transactions, and other relevant documentation concerning a counterpart. This process may require the use of various investigative techniques, including forensic accounting, data analysis, and legal research. This note discusses the use of asset tracing in international arbitration and when it should be performed.

Challenges in Enforcing Arbitral Awards and Why Asset Tracing May Be Warranted

Asset tracing may be useful in international arbitration, particularly when the prevailing party must enforce the award. The enforcement procedure involves executing the arbitral award in the country (or countries) where the debtor's assets are located.¹ Enforcement can be difficult when the debtor holds assets across several jurisdictions and the enforcing party lacks reliable or up-to-date information about these assets.

Enforcement of an arbitration award can become significantly challenging in some instances, notably in cases where:

• The losing party declares bankruptcy: If the losing party declares bankruptcy before the arbitration award is rendered or during enforcement proceedings, its assets may need to be liquidated to satisfy debts owed to all its creditors.² While most local courts interpret national bankruptcy legislations as not allowing for the non-recognition of an award against an insolvent company under Article V(2)(b) of the New York Convention,³ there is no guarantee that the enforcing party will successfully enforce the award and obtain the full amount owed by the losing party in the arbitration. The likelihood of success will depend on several factors, including the priority of creditors' claims, the timing of the registration of those claims, and the available assets for distribution among creditors.
• The losing party is dissolved, and assets are transferred to a new legal entity: If the losing party is dissolved before the award is enforced, and its assets are transferred to a new legal entity, enforcing the award directly against the new entity is, in principle, not possible. This is because the assets are no longer held under the name of the original entity involved in the arbitration at the time when the prevailing party decides to enforce the award. While recovery may remain possible, the new legal entity must typically be targeted in separate legal proceedings.
• The losing party is protected by sovereign immunity: States are usually protected by sovereign immunity. The level of protection of a State's commercial assets depends on the domestic laws of the country in which the sovereign entity's assets are located. Given the increase of investor-State disputes in recent years, some States have found creative ways to hide their commercial assets (usually not protected by sovereign immunity) to avoid paying arbitral awards.⁴ A method often used by sovereign entities is to hold their commercial assets through State-owned companies. Enforcing the award against State enterprises is often not possible since they are presumed to be legal entities distinct from the State.⁵

Although enforcement can be disrupted by many obstacles, the challenges encountered by the enforcing party are not always impossible to overcome.

In cases where the losing party declares bankruptcy or is dissolved, the prevailing party may be able to enforce the award against third parties, such as the parent company or the shareholders of the dissolved/bankrupted entity. For instance, in Northern Tankers (Cyprus) v. Backstrom, following the arbitral tribunal's decision that awarded damages to Northern Tankers, the prevailing party moved to confirm the arbitration award. However, six days later, Lexmar Liberia, associated with the case, filed for dissolution and, three days after that, for bankruptcy. In a decision dated 5 June 1997,⁶ the District Court of Connecticut was able to pierce large numbers of corporate veils at once, holding that an award against an impecunious Liberian company may be enforced against any or all of some 40 or 50 separate entities, as well as the individuals who controlled them.⁷

Moreover, in cases where the losing party is a sovereign entity, the enforcing party can try to prove that the State-owned company is subject to the State's "extensive control" to target commercial assets. This determination will depend on several factors, including the level of economic control exercised by the government, whether the profits of the State-owned entity are funnelled back to the State, and the extent of government officials' involvement in managing the entity or participating in its day-to-day operations.⁸

Because enforcement challenges are not impossible to overcome, asset tracing is an essential tool in arbitration proceedings. It can trace the origins of assets and determine, for example, what assets were in a company's name prior to dissolution or what commercial assets were held by a State when the arbitration was taking place. Using this method might increase the chances of successfully enforcing the arbitral award. However, it is necessary to act swiftly and follow practical steps to maximize the chances of obtaining enforcement of the arbitral award.

The Use of Asset Tracing in International Arbitration

To maximize the chances of enforcing an arbitral award, the prevailing party must prioritize asset tracing early on and develop a comprehensive enforcement plan. This section provides some practical tips to achieve this goal:

• Starting as early as possible: An informal investigation into the opposing party's assets can be a crucial part of a party's due diligence before a contract is agreed upon. This is primarily because once the other party becomes aware of potential liability for damages, it will have an incentive to restructure the ownership of its assets. The restructuring could involve actions such as dissolving the company and establishing a new legal entity to which assets are transferred or transferring commercial assets to a State-owned company if the opposing party is a sovereign entity to prevent the seizure of assets. Early identification and localization of the opposing party's assets can help track them later or request emergency interim measures to prevent the other party from dissipating its assets.
• Ensuring the counterparty is solvent: The informal investigation into the other party's assets may involve examining its financial situation to ensure it is not subject to insolvency. It can also include basic press research and searches in public registers. Those who are particularly cautious may even consider hiring an asset tracing firm before the contract is entered into. Additionally, it is crucial to check at an early stage whether the other party enjoys any form of immunity, which is typically the case for States, central banks, diplomats, consuls, and various international organizations.⁹
• Choosing an asset tracing firm according to identified needs: If the enforcement procedure targets assets located in several jurisdictions, it is best to select an asset tracing firm with an international capability.
• Providing clear instructions to the asset tracing firm: Once asset tracing agents are recruited, it is important to provide them with clear and detailed instructions, including all useful and available information already gathered. It is also advisable that the party looking to enforce the award specifies that only lawful means should be used to obtain information to avoid incurring civil or criminal liability.¹⁰ Moreover, it is important to work closely with the asset tracing firm throughout the entire procedure to help tailor the strategy according to the identified needs.

Conclusion

Through early investigation into the opposing party's assets and close collaboration with asset tracing firms, enforcing parties can increase their chances of effectively enforcing arbitral awards across multiple jurisdictions. This is not a panacea, however, but merely a mechanism of reducing the risk that arbitration proceedings will result in an arbitration award that cannot be subsequently enforced against the award debtor.

Footnotes

1. A. Dutton, M. Godden and B. Bruton, Multi-jurisdictional enforcement: chasing those assets, Practical Law UK, 2007.

2. K. Stephenson, H. Hothi, Impact of restructuring and insolvency on arbitration (Part 2), Practical Law, 2020.

3. G. Born, "Chapter 26: Recognition and Enforcement of International Arbitral Awards (Updated September 2022)" in International Commercial Arbitration (3rd ed. 2021), para. 26.05[C][9][i][v].

4. M. Bravin, T. Bey, T. Bowman, A. Gasanbekova, Enforcement and Recovery: Practical Steps, Global Arbitration Review, 2022.

5. A. Yanos, K. Bromberek, Enforcement Strategies where the Opponent is a Sovereign, Global Arbitration Review, 2021.

6. US District Court for the District of Connecticut, 967 F. Supp. 1391 (D. Conn. 1997) June 5, 1997.

7. B. Hanotiau, "Chapter 7: Enforcement of the Arbitral Award", in Complex Arbitrations: Multi-party, Multi-contract, Multi-issue – A comparative Study (2^nd ed. 2020), p. 418, para. 997.

8. A. Yanos, K. Bromberek, Enforcement Strategies where the Opponent is a Sovereign, Global Arbitration Review, 2021.

9. A. Dutton, M. Godden and B. Bruton, Multi-jurisdictional enforcement: chasing those assets, Practical Law UK, 2007.

10. A. Dutton, M. Godden and B. Bruton, Multi-jurisdictional enforcement: chasing those assets, Practical Law UK, 2007.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.