09 April 2020 - Article
The British Virgin Islands (‘BVI') is the leading offshore jurisdiction for incorporating companies. The BVI Business Companies Act, 2004 (as amended) (the ‘*Act*') is the statute which governs the incorporation and management and operation of over 700,000 companies (‘*BCAs*') It deals with the relationships between the companies, its directors and members. This article will firstly examine the changes in company law brought about by the introduction of the Act, especially the positive effect it has had on minority shareholders' rights and the way these rights can be exercised to combat fraud. The second part will address other methods of protecting against fraud in the BVI, including using liquidators' powers to do so.
BVI Business Companies Act 2004 actions
The BVI introduced provisions akin to sections 459 to 461 of Companies Act 1985 (under which previously unsatisfied minority shareholders had no other option but to seek winding up of a company on just and equitable grounds, an undesirable and, in many cases, unnecessary step).
Under the new Part XA of the Act, Members' the spectrum of remedies available to disgruntled shareholders is much wider.
There are provisions:
- for an application for injunction against a company or its directors if the Act or the company's memorandum or articles are contravened (also referred to as ‘Compliance Orders');
- establishing a statutory basis for derivative actions where a company cannot be relied upon to pursue its interests diligently or a company is best served if the conduct of proceedings is taken out of hands of the directors or shareholders as a whole;
- for members to bring action against a company if it has breached its duty to a member qua member. Where other members are likewise affected, the court may appoint a member to act for them in a representative capacity;
- giving the court a wide range of relief such that it can grant on the application of a member who considers himself unfairly prejudiced, including an order for a company or any other person to acquire the member's shares.
In addition to widening shareholders' rights in BVI, the new statutory framework also introduced criteria for the exercise of the court's discretion if a shareholder sought the court's permission to bring a derivative action. It provides that a court can grant such permission if it is satisfied that:
- a company will not bring, diligently continue, or defend proceedings; or
- it is in the interests of the company for the conduct of proceedings to be taken out of the hands of the directors or shareholders as a whole.
The additional factors that the court must take into account in exercising its discretion are:
- good faith of a shareholder;
- whether derivative action is in the interests of a company;
- prospect of success;
- cost/benefit of the relief sought; and
- availability of alternative remedy.
Furthermore, the court has the power to order directors to provide information or assistance to a shareholder in the proceedings and can determine the extent to which a company should bear its costs.
BVI Insolvency Act 2003 actions
No settlement or compromise can be agreed in a derivative action without court approval. As mentioned above, one method by which shareholders may attempt to halt fraudulent behaviour is by initiating winding up proceedings. This may become an increasingly important and widespread method adopted for combating fraud in the BVI.
Under the BVI Insolvency Act 2003 both creditors and shareholders may seek the winding up of a company on just and equitable grounds. It has been accepted by the BVI court that “just and equitable” is an open category and examples in case law are not exhaustive. In principle, the court appears to accept that it may be just and equitable to wind up companies if they are used as instruments of fraud.
It is far more preferable to seek court-appointed liquidators and provisional liquidators rather than a writ action combined with an interim injunction or receivership as:
- It is difficult to mount a forum non conveniens challenge in winding up proceedings in the company's jurisdiction of domicile. Simultaneous foreign proceedings will also bring the risk of anti-suit opposition;
- As proceedings under the Insolvency Act are aimed to be completed within 6 months of commencement, they are likely to be quicker and cheaper than a writ action;
- The potency of provisional liquidation might be the key consideration in fraud-related cases. Provisional liquidators usually have most of the powers of full liquidators apart from the power to liquidate and distribute assets. This presents an enormous benefit in fraud cases where assets need to be protected and company's affairs must be thoroughly investigated.
The fact that the BVI courts are still unclear about how to exercise their powers in this area was evident from their decisions in Safe Solutions Accounting Limited and another v Cruise Developments Corporation (2005) (unreported) and Safe Solutions Accounting Limited and another v Belvedere Invest & Finance SA (2005) (unreported). The court refused to appoint a liquidator (one of the authors of this article) on just and equitable grounds in both cases where the companies were allegedly instruments of fraud, in spite of the requirement to identify and preserve assets and to investigate affairs of the companies. Instead, provisional liquidators were appointed with the court citing mitigating factors for their surprising decision. Both cases have since been appealed. If anything, this case proves that this area of law I still in its development stages.
Notwithstanding the ambiguity surrounding the Safe Solution case, the applicants' ability to investigate fraud or uncover assets in the BVI has been greatly assisted by the use of provisional liquidators and liquidators. The court seemed not to baulk at accepting the appointment of the liquidator of the applicant company, jointly with a BVI liquidator, as a means of furthering the investigation of fraud. Whilst it might not have been the primary purpose behind the Act, it seems that the Act will become a major force in the ongoing battle against fraud.