Asset tracing is often associated with the unraveling of corruption or embezzlement, tax havens, and shell companies. However, it is equally applicable in the context of construction disputes and informs key parts of the wider legal strategy.
This is a form of forensic accounting that combines accounting and investigative skills to gain an understanding of a particular entity’s assets. Fundamentally, asset tracing is about gathering information about a particular entity from a range of sources, and using that to determine what assets the entity holds, where they are located, and what they are worth.
In any commercial dispute, the question of whether to commence formal legal proceedings can be thought of as an investment decision. That is to say, the decision should be informed by the likelihood that the money to be invested (in legal and court fees) will result in a sufficient return to make the investment worthwhile.
Obtaining a sufficient return through formal legal proceedings requires more than just winning in court. Success will be hollow unless it translates into receipt of the outstanding amount, and for this to happen, the counterparty must have sufficient assets to satisfy the amount to be paid. Nothing takes the wind out of the sails of a successful day in court like the realization that the other side has insufficient assets to recover from.
Understanding a counterparty’s assets, what they are worth, where they are located, and how to gain access to them is crucial to determine whether it is worthwhile commencing legal proceedings. It also helps inform the broader legal strategy and what measures might be necessary to ensure those assets are accessible at the end of the proceedings.
Fitting into legal strategy
In terms of timing, asset tracing is best employed when it becomes apparent that legal proceedings will be necessary to recover the outstanding amount. In a typical construction dispute, this generally happens once the work under the contract has reached completion and any contractual mechanism for resolving claims exhausted.
In such a scenario, key information to be obtained through asset tracing would include:
• What assets the other party holds in the home jurisdiction, what their value is, and whether any third-parties hold secured rights (such as mortgages) over them;
• If there are insufficient assets in the home jurisdiction, then information about assets located in other jurisdictions would be sought; and
• Whether the counterparty has other pre-existing liabilities to creditors or is embroiled in other legal proceedings.
This allows the claimant to make an informed decision about whether it is worth commencing legal proceedings, and also used to adapt the legal strategy to factor more than just the pure legal merits of the case. For example, a key consideration in any legal strategy is proportionality.
The time and costs associated with formal legal proceedings must be weighed against the total amount realistically likely to be recovered. This requires an accurate understanding of the counterparty’s assets. If the counterparty has minimal assets or its financial solvency is tenuous, it may be better for the claimant to focus on only their strongest and least complex claims, as these will be easier and quicker to prosecute and more likely to result in a positive return sooner. This mitigates the risk of the counterparty going insolvent during the proceedings.
Another key consideration is determining what interim relief (protective measures) will be necessary to secure the counterparty’s assets and ensure they are not hidden or transferred during the proceedings. Such measures can include freezing injunctions on bank accounts or attachment orders over physical assets such as land, machinery or vehicles.
Determining the necessary protective measures and successfully obtaining them from the relevant courts is not possible without an accurate and up-to-date understanding of the counterparty’s assets.
Relevance in the UAE
Businesses and individuals operating in the today’s globalized economy are more mobile, which can make it incredibly complex to gain an accurate picture of a particular entity’s asset holdings. This complexity is exacerbated when you factor in some of the characteristics of the UAE.
Firstly, the UAE represents seven legally distinct jurisdictions located in close proximity. This can be exploited to make the identification and recovery of assets more difficult, particularly if those assets are spread between different jurisdictions.
Secondly, the UAE has numerous free trade zones. These trade zones allow certain corporate entities to operate with greater freedoms than those established elsewhere and, often, have their own separate regulations which typically afford a high level of privacy to their users. This too can be exploited to make identification and recovery of assets more difficult.
Thirdly, company information is hard to come by in the UAE. There is no single register of companies in the UAE against which searches for financial, directorship or ownership information can be made, and there is no legal right of access to the corporate or financial information of an individual, a sole proprietorship, or a limited liability company.
These factors combine to make the UAE an especially challenging environment in which to gain an accurate understanding of a particular entity’s assets without the support of professional asset tracing services. The challenges associated with obtaining such information - combined with its intrinsic value to potential claimants weighing up formal legal proceedings - means that asset tracing is likely to increasingly form part of the legal disputes landscape.