With a Little Help from my Friends: Royal Court Assists Brazil with Piercing the Corporate Veil

Factual background

The facts alleged by the liquidator were as follows (there has been no final court ruling and some of these facts are being challenged in the Brazilian courts). From 2004 to 2010, the Probank Entities, controlled by the Machado Guimarães family, provided and maintained electronic voting services used for Brazil’s Federal and State elections. Between 2004 and 2006 the Probank Entities were restructured to conceal the family’s involvement and ultimately to enable the siphoning of funds for the benefit of the family. As a result of “dividend” payments to various entities connected to family members outside Brazil, the Probank Entities suffered severe financial distress and, in 2010 and 2011, filed for court-supervised reorganisation under Brazilian bankruptcy law. Ultimately the Probank Entities filed for liquidation. The Brazilian Court appointed Mr Sergio Lima as Judicial Administrator (liquidator) of the Probank Entities and estimated their debt at over $150m.

Applying a Brazilian bankruptcy provision which has no equivalent in Jersey law, the Brazilian Court, at the request of the liquidator, extended the effect of the bankruptcy order to twenty-eight individuals and entities who were supposedly associated with the Probank Entities or to the misapplication of their assets. Two of these individuals were Peônia Guimarães Machado and her husband Mr Paulo Cezar Martins (now deceased). Following a discovery exercise pursuant to ancillary bankruptcy proceedings in the US, the liquidator alleges that a number of transfers had been made by a company linked to Paulo into a Jersey bank account in his name.

The Brazilian Court consequently sent a Letter of Request to the Jersey Court, asking for Mr Lima to be recognised as Judicial Administrator in Jersey of the Probank Entities and the named related parties. Mr Lima sought the powers that would be available to an equivalent Jersey office holder in respect of identification and control of the bank accounts of Paulo and Peônia, so that any monies could be remitted to Brazil for the benefit of creditors.

The Jersey Court’s jurisdiction

There is no direct insolvency relationship or mutual recognition treaty between Jersey and Brazil, or any statutory jurisdiction under Article 49 of the Bankruptcy (Désastre) (Jersey) Law 1990. Nevertheless, the Court found that it did have customary law jurisdiction to make the order sought in the letter of request. This was based on a number of cases including Lydian International Limited [2020] JRC 049 where the Court applied principles of comity to make orders ancillary to those made in a Canadian court even though there were no equivalent processes in Jersey.

Judgment

The Court decided to exercise its discretion in favour of granting the relief sought by Mr Lima for the following reasons:

• The Letter of Request
• The Court’s willingness to assist victims of financial or commercial misconduct wherever it has occurred
• The powers sought being consistent with the powers that the Viscount has in a domestic désastre
• The powers sought being limited to Paulo and Peônia
• The interests of comity in that the Brazilian Court would likely show the same courtesy to a Jersey Court in similar circumstances
• The Viscount and the Attorney General having no objections
• Courts in other jurisdictions giving similar orders pursuant to requests from the Brazilian Court
• There being no aspects of the foreign law and procedure in question which were contrary to Jersey public policy
• The Court’s desire to give effect to the decisions of overseas courts which are aimed at restoring misapplied assets in order to satisfy creditors

Conclusion

This case is an example of the Court’s willingness to recognise foreign bankruptcy proceedings in the absence of an express reciprocal jurisdiction and in relation to a bankruptcy process that is not known to Jersey law. It is a welcome addition to the Court’s developing toolkit for assisting in the global fight against the fraudulent misappropriation of funds.