A case in point

Having undoubtedly proven itself to be one of the world’s pre-eminent financial centres, the British Virgin Islands are a striking benchmark of the global economic downturn. By Andrew Willins

The British Virgin Islands (BVI), with Tortola, the largest of the islands, only 12 miles long and three miles across, is scarcely detectable on an atlas. Nevertheless, the territory is now firmly established as one of the leading financial centres in the world, with more than 800,000 ­companies incorporated within its shores.

It is a major centre for the incorporation of hedge funds and a jurisdiction particularly favoured by those operating in Russia, Cyprus and the Middle East. Its success owes much to an innovative legislative regime for companies, an established judicial system, which has the Privy Council as its final court of appeal, and a sophisticated ­infrastructure of international law firms, trust companies and accounting practices.

It was perhaps inevitable that, as the tides of economic fortune have receded, stricken companies, poor investments and in some cases fraudulent activities have been exposed.

The past year has therefore proved to be an interesting barometer of the global ­economic meltdown; the formal opening of the islands’ new Commercial Court on 4 May could scarcely have been more timely.

The Commercial Court will become the third division of the Eastern Caribbean Supreme Court – the superior court of record for the BVI.
Currently it consists of two divisions, the High Court and the Court of Appeal, of which the latter is an itinerant court, the ­sittings of which rotate between the nine members of the Organisation of Eastern Caribbean States.

The building for the new Commercial Court is not yet complete and the rules are yet to be published, but the court’s first judge, experienced English silk Edward Bannister QC, has already begun to sit.

Litigation trends in the BVI

2008 began typically enough, with the court being called upon to consider the usual mix of shareholders disputes, fraud and asset-tracing claims and forum challenges. One of the first cases in the docket, on 29 January 2008, was Imanagement Services Limited v Cukurova, a claim based on conspiracy, abuse of civil process and malicious falsehood.

Then in July 2008 came the BVI sequel to the long-running battle between Tajik ­Aluminium and Oleg Deripaska’s Rusal Group. Tajik sought to resist a stay on forum non conveniens grounds – similar grounds to those advanced before Mr Justice Christopher Clarke in Cherney v Deripaska (2008).

Then Madam Justice Indra Hariprashad-Charles on 20 June 2008 provided guidance in relation to the treatment of costs incurred by non-BVI admitted lawyers in Michael Wilson & Partners v Temujin & Others. Michael Wilson & Partners was ordered to pay $395,085.84 (£241,913.16) after ­capitulating at the door of the court on its application to continue a receivership.

That was a complex, transjurisdictional litigation of a type not atypical in the BVI, resulting in challenges to orders appointing receivers.

One facet of this case was that disputes arose in relation to the ultimate beneficial owners of the shares of two BVI companies, perhaps fostered to some extent by the absence of a publicly searchable register of members, but persisted with even after ­powerful evidence had been adduced to the contrary.

Little more than three months after the decision at first instance, the Court of Appeal was persuaded that its earlier ­decisions, upon which the first-instance judge was bound, were wrong, being based on an understanding of the law that had been overtaken by the English decision in Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft GmbH (1983). The court expressed itself in withering terms in relation to Ninemia’s evidence, which was “at best a litany of speculative assertions”, and so discharged the orders.

On 30 December 2008, Madam Justice Rita Joseph-Olivetti discharged ex parte receivership and freezing injunctions in the well-publicised Dannone v Golden Dynasty Enterprises & Others, principally on the grounds that the case had not been presented fairly by the leading counsel for the claimants at the ex parte stage.

By the second half of 2008 the tide had begun to turn towards insolvency work, and it seems likely that this will continue.

The fallout from the Madoff fraud has yet to receive much attention before the BVI courts, but several funds that have ­Madoff exposure have suspended ­redemptions. Litigation is brewing.

Then came what might be one of the more enduring legacies of the financial crisis, Joseph-Olivetti J’s judgment on 14 ­November 2008 in SV Special Situations Fund Limited v Headstart Class F ­Holdings Limited.

It begins with a colourful reminder, not least given the discovery of the Madoff frauds only weeks later, that “hedge funds are sophisticated investment vehicles ­reminiscent of hedgehogs or sea urchins which tend to prick badly if not carefully handled”.

In SV Special Situations, the court was called upon to consider whether a ­redeeming member was a creditor for the purposes of the BVI Insolvency Act 2003. The court answered this question in the affirmative. Significantly, it held that the redeeming member’s claim did not accrue in its capacity as a member, but pursuant to a liability arising in contract.

Similar questions have been litigated before the courts in Bermuda and the Cayman Islands, with slightly different results.

Andrew Willins is an associate in the ­litigation & insolvency group of Appleby’s BVI office