British Virgin Islands

Litigation specialists in the British Virgin Islands (BVI) report that half or more of their work now consists of cases involving international business companies owned by, or investing in, Russian interests. The litigation boom is one factor pushing the BVI government to establish a new commercial court.

For example, a battle for control of MegaFon, Russia’s third-largest mobile phone operator, is being fought out in the BVI courts. The legal tussle, which has been underway for more than a year, involves a swathe of the islands’ law firms.

On 19 October 2005, IPOC International Growth Fund, an entity based in Bermuda, announced that it had won an injunction from the BVI Court of Appeal preventing Russia’s Alfa Group from disposing of a 25.1 per cent stake in MegaFon, over which it claims ownership rights.

IPOC argues that Alfa’s purported acquisition in 2003 of CT Mobile, the company that held the 25.1 per cent stake, was invalid because IPOC held a valid option to acquire CT Mobile from its then owner LV Finance. Since then, ownership of the MegaFon shares – which Alfa says are now worth as much as $1.2bn (£670m) – has been fought over in legal forums, including arbitration in Switzerland and a court in the Bahamas, as well as the BVI courts.

However, Alfa retorted that IPOC’s announcement was nonsense. In fact, according to CT Mobile chief executive Dmitri Vozianov, the stake in MegaFon has been frozen since court proceedings began in 2003. What the BVI Court of Appeal actually decided, he told Dow Jones Newswires, was that it would not prolong the freeze order beyond 18 November. IPOC, as it acknowledges itself, is now applying to the Privy Council in London to extend the freezing of the stake after 18 November.

The courtroom contest is not only extremely complex, but politically charged. Alfa has alleged, for instance, that Leonid Reiman, Russia’s telecommunications minister, continues to stand behind Telekominvest, a company that he helped found in 1994 and which owns 31.3 per cent of MegaFon.

Reiman has also been linked to IPOC, which already owns a further 6.5 per cent of the mobile phone operator. Alfa and LV Finance have sought to have the claim dismissed on the grounds that IPOC is a criminal enterprise and that money which it used to fund the BVI case came from corruption and money laundering. This has prompted investigations into the role played by leading German and Swiss banks, including Commerzbank, in the alleged looting of assets from the Russian state.

It is the stuff of lurid headlines, but increasingly all in a day’s work for lawyers in the BVI, where Russian-related cases represent an increasingly large chunk of the litigation workload.

“It’s not an exaggeration to say that 70 or 80 per cent of my time, particularly over the past four or five years, has been dealing with these very big former Soviet bloc cases,” says Phillip Kite, head of litigation for BVI-based firm Harney Westwood & Riegels. “Going back to the late 1990s, we’ve had a regular flow of very big Eastern European litigation, primarily concerning natural resources such as oil, aluminium and gas.”

Michael Fay, a predecessor of Kite as head of litigation at Harneys and now a partner at Walker Smiths, tells a similar tale. “Between 40 and 50 per cent of my time over the past three years has gone on litigation where there are Russian-related parties,” he says.

Both firms have been involved in the IPOC-Alfa litigation, a case that stands out not only for its duration, but for the sheer number of BVI lawyers it has employed. Kite says: “There are 16 defendants in four groups, all of whom have their own lawyer. There are also lots of other interested parties who retained their own lawyers to go down and listen to the court hearings.”

The IPOC-Alfa litigation is also notable, Fay says, in that it involves two Russian-related parties, whereas most cases feature joint ventures or investments by Western companies. However, the common threads running through nearly all cases are disputes over the ownership of assets and/or alleged abuse of the rights of minority shareholders.

Kite says: “A fairly typical area of dispute is where joint ventures between local interests and Western investors for some reason break down. A lot of the time, the joint venture vehicles, or the assets held by the joint venture vehicles, or both, are held through BVI companies.”

Hélène Anne Lewis, a partner with Morgan & Morgan and former head of the BVI Bar Association, notes that the rise in firms’ litigation caseloads can be traced back to a surge in the use of BVI international business companies (IBCs) nearly two decades ago. “Many of these companies have now been in existence for as long as 20 years and involve commercial transactions that have become sore issues,” she says. “The IBC legislation in the BVI was introduced in 1984, but the big growth in offshore companies started around 1988. There would also have been a surge in incorporations from the former Soviet Union in the mid-1990s.”

Fay says that, while Hong Kong is by far the biggest market for BVI offshore companies, Russia remains the pre-eminent source of new litigation business, although “Hong Kongers can be litigious as well”.

There are important differences in approach between the two groups, he believes. “Once you start litigating, among the Chinese the question of who wins and who loses is significantly more important than how much you win,” Fay says. “This isn’t something that’s applicable to the Russians. There, litigation is all about the money rather than saving face.”

Almost as spectacular as the IPOC-Alfa affair is a case in which Sibir Energy, a UK-based oil firm 51 per cent owned by Russian billionaire Chalva Tchigirinski, is suing another oil company, Sibneft, over the allegedly fraudulent dilution from 50 to 1 per cent of its stake in a joint venture to develop the $3bn (£1.69bn) South Priobskoye oilfield in Siberia.

Sibir scored a highly-publicised coup in July when it obtained a BVI court order requiring Sibneft’s then majority shareholder, Chelsea Football Club owner Roman Abramovich, to disclose all his individual assets, valued at more than $1m (£560,000), and ordering Abramovich and Sibneft each to ringfence $1bn (£560m) worth of assets until ownership of the rest of Sibir’s former stake was resolved. Abramovich has since agreed to sell his stake in Sibneft to state-owned energy company Gazprom for as much as $14bn (£7.86bn).

The case bears a striking similarity to a lawsuit brought by Irish mining firm Celtic Resources, which pledged 30 per cent of its 50 per cent stake in a gold and silver mine to a Russian bank as security for a loan. However, when Celtic repaid the loan in 2002, it discovered that the stake had been transferred via a Cayman Islands company to one in the BVI. Last month it relaunched legal action in the BVI against the new owner of the shares.

Earlier this year, UK-based Russian businessman Oleg Deripaska, chairman of Russian Aluminum, settled a seven-year dispute over the alleged wrongful termination of a joint venture to trade metals in London and New York. Deripaska resolved the dispute after Trans-World Metals, his partner in the venture, obtained a ruling that the case would be heard in the BVI rather than in Russia.

According to Fay, this is par for the course in the BVI, where he says the decisions that are actually handed down in Russian-related actions are overwhelmingly about jurisdiction. “Typically, in a dispute between Russian parties and outside investors, the Russians are anxious to get the case back into the Russian courts, while the outside investors want to keep it out,” he says. “Substantial issues don’t go to a hearing – we haven’t had a trial here on any of these Russian cases. They’re either settled, or the High Court decides to stay proceedings here while the litigation proceeds elsewhere.”

Although cases originate from disputes in the former Soviet Union, typically BVI firms are instructed out of London, according to James Hilton, a litigator with Appleby Spurling Hunter. “Most cases are run out of London offices, even if the original instruction is in Moscow,” explains Hilton. “Just as with any case in a foreign jurisdiction, we tend to be relied upon quite significantly because we have the local knowledge. But in the same way as any magic circle firm in London would go to the commercial bar and ask for a pretty hefty silk to present the case, we avail ourselves of the same luxury here. It enables us really to punch above our weight.”

Kite says there are around 25 full-time litigators in firms on the island, plus others at smaller firms who do a mixture of work, including litigation. He argues that the sector has been boosted by the arrival over the past few years of a number of firms with bases in other offshore centres, such as Walkers from the Cayman Islands and Applebys from Bermuda.

Fay notes that incoming firms have often moved into the BVI by acquiring existing law practices, in many cases those with a strong reputation for commercial work. However, he says there has been a number of new additions to the litigation field over the past few years, including Conyers Dill & Pearman, Martin Kenney & Partners, a specialist in fraud and asset recovery which has moved from Dublin to the BVI, and his own firm, Walker Smiths.

Lawyers in the BVI are convinced that the Russian cases have not only helped both local practitioners and judges to develop expertise, but that they have given the islands’ reputation a boost as a transparent jurisdiction that is not a black hole into which legal proceedings can disappear without trace.

Mark Forté, who joined Conyers in June last year as head of litigation for the BVI and Anguilla, says: “We’ve seen large-scale, multi-party cases with large numbers of lawyers hosted here, despite attempts by one or more parties to remove it to a larger jurisdiction for convenience’s sake. This jurisdiction seems to be reacting to the sophistication of the work that’s coming here, both in private practice and in the government.”

According to Hilton, the BVI compares favourably as a jurisdiction with many other offshore centres. “We’ve had a succession of extremely able judges who’ve become very responsive,” he says. “The quality of the judiciary has really taken off in the past five years. It’s very positive for a jurisdiction to have a reputation for the quality of its justice. The BVI is a transparent jurisdiction when it needs to be.”

Forté argues that this reputation will be enhanced further when, as is increasingly likely, the government establishes a dedicated commercial court for the territory – an initiative that has been under discussion for several years. He says: “We’re now at the stage of a consultative process with experts being brought in to assess how the court would be set up.”

Simon Gray is a freelance journalist and the former editor of International Money Marketing