The Dispute Resolution Review - British Virgin Islands

Article by Arabella di Iorio and Ben Mays1

I INTRODUCTION TO DISPUTE RESOLUTION FRAMEWORK

The British Virgin Islands (BVI) is a British Overseas Territory, and the British government is responsible for foreign affairs and defence. Executive authority is vested in Queen Elizabeth II and is exercised on her behalf by the Governor, currently His Excellency Mr Boyd McCleary and, from July 2014, Mr John Duncan OBE. There is, however, a large degree of internal self-government. A new constitution was adopted in 2007, and the country is now led by the Premier, who is elected in a general election and who nominates a Cabinet, which is appointed by the Governor. The legislature consists of the Queen (represented by the Governor) and a House of Assembly. The official currency is the United States dollar. There are no exchange controls and no restrictions on the free movement of currency.

Since the 1960s the BVI has steadily moved from an agriculture-based economy towards tourism (mainly boat chartering, although it is also a cruise ship destination and popular beach resort) and financial services. It is now a leading offshore financial centre. Some 950,000 companies have been incorporated in the BVI and it is the second-largest domicile for the formation of offshore investment funds.

The Eastern Caribbean Supreme Court (ECSC) is the superior court of record for the BVI, as well as for Anguilla, Montserrat, Antigua and Barbuda, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Grenada, and Dominica. The ECSC is headquartered in Castries, Saint Lucia, although each member state has its own High Court Registry and its own High Court Judiciary. Since 2009 the ECSC has had a dedicated commercial division, located in the BVI, with its own judge (currently Mr Justice Edward Bannister QC) and its own modern premises. Appeals from the High Court are to the ECSC Court of Appeal, which sits in the BVI approximately three times a year, and appeals from the Court of Appeal are to the Judicial Committee of the Privy Council in London. The BVI also has a Magistrates Court, which has both a criminal and a civil jurisdiction, and from which appeals lie directly to the Court of Appeal.

II THE YEAR IN REVIEW

i Derivative proceedings

2013 was the year of the derivative action, with important clarification as to the scope of derivative proceedings in the BVI from the Court of Appeal, which confirmed that there can be no restriction on proceedings brought derivatively other than that they be in the name of and on behalf of the company in which the applicant is a member. What causes of action fall within that restriction is a matter for the lex fori and so a shareholder may be able to pursue in other jurisdictions claims that would not be open to it in the BVI. Given the stark difference in approach to separate corporate identity taken in the BVI (in particular post-Petrodel )2 compared to jurisdictions such as Delaware, careful consideration of potential fora is required by the shareholder of a BVI parent when its subsidiary has suffered a loss.

The BVI has an entirely statutory scheme for derivative claims, in contrast to Hong Kong, where the common law is expressly preserved, or England, where the common law has recently3 been found to co-exist with the statutory scheme. Section 184C(6) of the BVI Business Companies Act 2004 (the Business Companies Act) states:

Except as provided in this section, a member is not entitled to bring or intervene in any proceedings in the name of or on behalf of a company.' Section 184C(1) of the 2004 Act states that: 'Subject to subsection (3) [gateways before the discretion is triggered], the Court may, on the application of a member of a company, grant leave to that member to: (a) Bring proceedings in the name of and on behalf of that company; or...

The backround to the first decision to be considered, Microsoft Corporation v. Vadem Ltd4 was that Microsoft owned 11.8 per cent of the shares in a BVI registered company Vadem Limited (Vadem BVI), which in turn had a wholly owned Californian subsidiary Vadem Inc, (Vadem California). Microsoft initially brought a derivative claim in Delaware, on behalf of Vadem BVI, asserting wrongdoing (by the CEO of both Vadem BVI and Vadem California, among others) in relation to the transfer of intellectual property from Vadem California to a NewCo at an undervalue. That claim was dismissed, without prejudice, in order for Microsoft first to obtain the permission of the BVI court.

At first instance, Vadem BVI argued that the proprietary claims that were sought to be brought in Delaware were causes of action vested in Vadem California and so amounted to a double derivative action, which was not permitted under BVI law, and which, accordingly, could not be authorised to be brought in Delaware. Microsoft argued that: it was not a requirement of BVI law that the cause of action be vested in the company that the applicant is a member of;5 and whether the causes of action were available to be brought by Vadem BVI was a matter for the Delaware court.

Microsoft's primary position was that, under the law of Delaware or California, its claims were single derivative claims. In the circumstances of this case the alter ego doctrine in those jurisdictions would operate so as to make causes of action formally vested in Vadem California available to Vadem BVI to pursue in Delaware. Even if Vadem BVI would not be able to bring such a claim in the BVI, that did not mean that the BVI court could not authorise the claim to be brought elsewhere.

The judge rightly considered that it was a matter of construction of Section 184C(1)(a) of the Business Companies Act, and concluded that: a shareholder in (only) a parent company could not be authorised to bring a claim in the name of and on behalf of a subsidiary, because the applicant is not a member of 'that company', as required by Section 184C(1)(a); and the proceedings that the parent company could be authorised to bring were limited to causes of action vested in the parent company.

Accordingly, Microsoft had no authority and could not be authorised to prosecute, whether in the BVI or anywhere else, causes of caution vested in Vadem California.

On appeal by Microsoft, the Court of Appeal agreed with the court below that a shareholder can only be authorised to bring proceedings in the name of and on behalf of the company in which it is a member. The BVI court could not authorise Microsoft to bring - in the BVI or in Delaware - a claim in the name of and on behalf of Vadem California. However, the Court of Appeal agreed with Microsoft that the learned judge's construction of Section 184C(1)(a) was otherwise wrong: the Court was not entitled to limit the scope of the permission to causes of action vested in Vadem BVI, or to prohibit it from pursuing causes of action vested in Vadem California.

The proper permission is accordingly the wording of the statute without embellishment: 'the court can and should simply give leave to Microsoft to bring proceedings in the name of and on behalf of Vadem BVI.'

The often uncomfortable relationship between unfair prejudice and derivative claims was considered by the Court of Appeal in Andriy Malitiskiy et al v. Oledo Petroleum Ltd.6 The appellants wanted to bring both a derivative claim (in which they sought corporate remedies) and an unfair prejudice claim (in which they sought personal remedies as shareholders). The facts, in summary, were these: The appellants each owned half of Oledo, a BVI company at the top of a chain of filling stations in the Ukraine. A Mr Adamovsky owned the other half, and was the sole director of Oledo. In 2009 the parties agreed to separate, and to sell Oledo's business. This they did, for US$71.5million, but Adamovsky transferred the entire sum to an account in the name of his own company, leaving Oledo an empty shell. In their unfair prejudice case, the appellants sought compensation for the diminution in value of their shares. In their derivative claim, they sought to claim against Adamovsky and his company in the name of Oledo, to recover the US$71.5million. At first instance, provisional permission to bring the derivative proceedings was refused (see the postscript below for comment on the manner in which the derivative claim was launched) on the basis, among others, that the unfair prejudice action was capable of giving the appellants everything they could obtain derivatively.

The Court of Appeal's starting point was that an aggrieved shareholder may well have a choice of remedy available to him or her, and that while the availability of an unfair prejudice claim was a highly relevant factor, it was not an automatic bar to a derivative action. Accordingly, the court would not refuse permission to bring a derivative action, simply because an unfair prejudice claim was also available. The court would, however, refuse permission7 where all that could be achieved in the derivative claim could be achieved in an existing unfair prejudice action. The better course was to allow only one to proceed, and not to consolidate the two. As to the appellants' contention that they were seeking different remedies, each of which could only be sought either derivatively or via the unfair prejudice route, the court was not persuaded. While the court agreed that both remedies were available, it found that they were inconsistent because if the company recovered its loss (via the derivative claim) there would be no diminution in value that the appellants could recover qua shareholders.

If the party wants to bring a derivative claim that requires an ex parte application for a freezing injunction the statute is silent, but the first instance court adopted the sensible and practical approach of granting preliminary leave, enabling the injunction to be obtained, then having the matter returned for an inter partes hearing.

ii Investment fund cases

One cannot review 2013...