Fraud, Asset Tracing & Recovery 2023 - British Virgin Islands (Commercial Dispute Resolution, CDR)

• Published date: 31 May 2023
• Subject Matter: Litigation, Mediation & Arbitration, Criminal Law, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Arbitration & Dispute Resolution, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Carey Olsen
• Author: Alex Hall Taylor KC, Richard Brown, Tim Wright and Simon Hall

This guide explores the latest legislative, regulatory and enforcement developments in the British Virgin Islands and provides expert analysis on industry-wide topics including the local legal framework, the main stages of a fraud case, parallel proceedings, cross-jurisdictional mechanisms, recent developments, technology and other impacting factors.

EXECUTIVE SUMMARY

The British Virgin Islands (BVI) are a major offshore financial centre, particularly specialising in the formation of group parent companies, asset-holding special purpose vehicles and investment funds. The BVI's recognisable English law origins and progressive legal framework governing the administration of trusts have made it a popular jurisdiction for international private wealth structures. As described further below, the BVI is a truly international jurisdiction and its relationship to fraud, asset tracing and recovery must be seen in this context.

The pace and complexity of the work before the BVI Courts continued uninterrupted throughout the COVID-19 pandemic, from which the BVI has now, thankfully, emerged. New digitally-led practices and procedures, which were introduced to combat the pandemic, look set to stay.

The BVI Courts continue to be at the leading-edge of significant and high profile disputes, particularly in the crypto space. In doing so, they have continued to show their innovation and adaptability in the face of novel and complex issues. The BVI Courts and the financial services industry have also had to grapple with the introduction of increasingly severe sanction regimes against Russian-related entities. These have had a significant impact on the ability of sanctioned entities to continue to operate in the BVI, including to continue litigation.

IMPORTANT LEGAL FRAMEWORK AND STATUTORY UNDERPINNINGS TO FRAUD, ASSET TRACING AND RECOVERY SCHEMES

As a self-governing British Overseas Territory, the BVI's legal system is rooted in English common law and equitable principles supplemented by legislation passed by the BVI's legislature and certain statutes and instruments passed by the UK Parliament and extended to the Territory by Order in Council.

The BVI has a sophisticated High Court with a dedicated Commercial Division. There is a strong local appeal court in the ECSC Court of Appeal, which is based in St Lucia and sits regularly in the BVI three times a year. It will also sit for urgent or heavyweight appeals outside of those scheduled sittings. The final court of appeal is the Judicial Committee of the Privy Council, which sits in London and consists of justices of the UK Supreme Court.

The legal rights and remedies available in relation to fraud, asset tracing and recovery are broad and powerful, in a similar manner to other developed common law jurisdictions. The key BVI legislation regulating company law is principally the Business Companies Act 2004 (BCA), the Insolvency Act 2003 (Insolvency Act) and related enactments. The BVI Court can also rely on provisions of the Eastern Caribbean Supreme Court (Virgin Islands) Act (Supreme Court Act) to incorporate historic powers of the English Court, as it has done in relation to the Court's ability to grant charging orders over shares in BVI companies.

The BVI Court has also recently enforced English law applicable on the settlement of the islands including, specifically, the Fraudulent Conveyances Act 1571, the Statute of Elizabeth. The Commercial Division has its own modified set of rules (from the base ECSC Civil Procedure Rules 2000 (EC CPR)) and its own Practice Direction, as well as a series of Practice Notes. A Commercial Court Guide remains under consideration.

Injunctions and receivers

As a predominantly holding company jurisdiction, the preservation and protection of assets is vital, as is the ability for litigants and creditors to enforce against them. At the early stages of a dispute, often a party suspects illegitimate dealings in the shares of BVI companies. EC CPR 49 allows any person claiming to be beneficially entitled to stock (shares) to apply for a Stop Notice or a Stop Order. A Stop Notice is a useful interim tool, requiring a party on whom it is served to give notice of any proposed dealings with specified shares, and a Stop Order prevents certain steps from being taken with respect to shares and/or monies held in court. These are often used but only take matters so far. The need for further protection means that injunctions are an important and regular part of BVI legal practice.

The BVI courts exercise a statutory jurisdiction pursuant to section 24 of the Supreme Court Act to grant injunctive relief where it is just and convenient to do so. This gives the BVI Court a broad and flexible jurisdiction similar to relief available in other common law jurisdictions. The BVI Court may therefore, for example, grant freezing ("Mareva"), prohibitory, mandatory or proprietary injunctive relief on an interim or final basis. In appropriate circumstances, injunctions may be obtained on an ex parte and urgent basis, and the Commercial Division has a well-established and effective Certificate of Urgency procedure for dealing with urgent cases.

In a welcome statutory development in early 2021, an amendment was made to the Supreme Court Act (incorporated as section 24A) to confirm that the BVI Court also has jurisdiction to grant injunctive relief in support of foreign proceedings, including against non-cause of action defendants (the so-called Black Swan jurisdiction, see further below).

The BVI Court may also grant injunctive relief in relation to any arbitral proceedings which have been or are to be commenced in or outside of the BVI pursuant to section 43 of the BVI Arbitration Act 2013. Indeed, relief in support of foreign arbitrations and the enforcement of arbitration awards is a major part of BVI litigation, and the BVI is generally a pro-arbitration jurisdiction.

For an additional level of protection, a claimant may also apply to court for the appointment of a receiver. A receiver is a professional person (such as a qualified accountant or insolvency practitioner) appointed by the BVI Court to receive and deal with certain assets, usually in support of and in order to "police" a freezing injunction. The ECSC Court of Appeal has emphasised that receivers should only be appointed when it is just and convenient, and should not be ordered when the freezing injunction provides adequate protection. (Alexandra Vinogradova v (1) Elena Vinogradova, (2) Sergey Vinogradov [2018] BVIHCMAP 052.)

It is standard practice for the BVI Court to order a respondent to disclose information about its assets when it makes a freezing injunction or a receivership order, in order to allow the claimants and/or the receiver to police the orders.

As such, BVI injunctions have some teeth. A defendant may be found in contempt of court if they are in breach, which may have grave consequences for the defence of a BVI claim, but only goes so far. If an individual defendant, or the director of a BVI company, is out of the jurisdiction, a BVI Court ordering committal may be of little concern, although such orders are, and have recently been, made.

Further, and similarly, BVI injunctions and receivership orders may technically have "worldwide" effect, but the BVI Court does not seek to impose exorbitant, extra-territorial jurisdiction on persons not before the Court and regarding property abroad. The BVI Court has adopted the same "Babanaft" provisos in its injunction orders as the English Commercial Court (Babanaft International Co v Bassatne [1990] Ch. 13 at 44), out of respect for judicial comity. Steps may therefore be required in the local courts before a BVI order becomes fully effective abroad.

Third-party disclosure orders and letters of request

The BVI has long followed the equitable common law jurisdiction to grant disclosure orders. A Norwich Pharmacal order allows an applicant to obtain disclosure from a third party who is likely to have the relevant documents or information and who has become mixed up in wrongdoing committed against the applicant. Letters of request to foreign courts to obtain evidence in support of BVI proceedings, and to the BVI courts in support of foreign proceedings, are also an option in line with the Hague Evidence Convention.

Potential claims

As in the UK and other common law jurisdictions, there is no specific civil cause of action in "fraud" in the BVI. However, various claims are available in contract, tort, equity or otherwise depending on the circumstances, such as deceit, fraudulent misrepresentation, conspiracy, dishonest assistance, knowing receipt, breach of fiduciary duty, restitution, bribery and secret commissions. The legal and equitable remedies of tracing and following are also available to claimants in order to seek the return of property and assets.

Various statutory claims may also be available. For example, to set aside...