Islands’ swapping

The introduction of the BVI Business Company in place of the former International Business Company is unlikely to stem the flow of incorporations into the British Virgin Islands, argues James Hilsdon

The British Virgin Islands (BVI) is one of the leading offshore incorporations jurisdictions. Since 1984, the International Business Company (IBC) has been the offshore vehicle of choice for many, especially in the Far East and, more recently, in the Russian Federation. Almost 700,000 IBCs have been incorporated to date.

The introduction of a new and unfamiliar offshore company product, the BVI Business Company (BVIBC), has done nothing to stem the tide of incorporations into the jurisdiction. We are now more than midway through a two-year transitional period between the old International Business Companies Act 1984 (IBCA) regime and that of the new BVI Business Companies Act 2004 (BVIBCA) and, since 1 January 2006, all new incorporations have been BVIBCs. Registered agents reported hundreds of new incorporations within the first days of 2006.

The death of the IBC
Accountability to members under the IBCA is, frankly, limited. The provision which governs a member’s access to company records may be summed up as a ‘right to ask, not a right to receive’. Often the only substantive remedy available to a disgruntled minority shareholder is the drastic one of seeking the winding up of the company on just and equitable grounds; a result that may suit none of the parties involved.

The days of IBCs are, however, numbered. From 1 January 2006 all new incorporations have been BVIBCs. Existing IBCs remain in being, unless voluntarily converted to BVIBCs, until the end of the year when all remaining IBCs will automatically be converted to BVIBCs. While IBCs remain, they will be governed by the IBCA and not the new statutory regime. Availability of improved shareholder rights and remedies may be a consideration in converting IBCs ahead of time.

The BVIBCA and shareholder remedies
One of the most significant changes introduced by the BVIBCA is the availability of statutory remedies for shareholders, including provisions similar to sections 459 to 461 of the UK’s Companies Act 1985. It is worth noting that this change was only brought into being by the BVI Business Companies Amendment Act 2005. Hitherto-disgruntled minority shareholders continued to be left out in the cold.

The BVIBCA, as originally passed, made the position of a minority shareholder potentially even less favourable than it had been under the IBCA. In the context of joint ventures, the ability to appoint directors on the footing that they need not represent the interests of the members as a whole might have seriously prejudiced the ability of a minority shareholder to pursue one of the few remedies available to it – the application of a liquidator on just and equitable grounds.

Compliance orders
Both shareholders and directors now have a direct route to injunctive relief where correct corporate governance is not observed or its violation is threatened. If the company or a director engages, or proposes to engage, in conduct that contravenes the BVIBCA or the company’s memorandum or articles, a member or director may apply to the High Court, either to restrain the wrong doing or to force compliance with the statute, memorandum or articles.

In this connection, it should be noted that the BVIBCA largely dispenses with the traditional concept of ultra vires. Acting outside of the scope of a company’s objects clause seems set to become a thing of the past as, save for restricted-purpose companies, it is no longer necessary to include an objects clause in the memorandum. This reduces the potential for a company to act without capacity and the BVIBCA goes further by providing that no act of a company is invalid only by reason of want of capacity.

Common law does not recognise the jurisdiction to grant ‘free-standing’ injunctions and the BVI Court has applied the English case of Siskina (Cargo Owners) v Distos Compania Naviera on many occasions.

The significance of this new provision, therefore, is that it bases jurisdiction for the BVI court to grant injunctive relief to assist in the regulation of a company’s affairs without the applicant needing to establish that the contravention of the statute, memorandum or articles complained of is such as to give rise to a cause of action on the part of the applicant and the applicant would not need to launch substantive proceedings.

Derivative actions
Though in common law a member was always able to try his luck at gaining the court’s permission to mount a derivative action, the new statutory framework adds greater certainty to the process by establishing the criteria for the exercising of the court’s discretion.

Permission may be granted only where the court is satisfied that the company will not bring, diligently continue or defend proceedings, or that it is in the interest of the company for the conduct of the proceedings to be out of the hands of the directors or of the shareholders as a whole.

Additionally, the court ‘must’ take into account: the good faith of the member; whether the derivative action is in the interests of the company; the prospects of success; the cost/benefit of the relief sought; and the availability of an alternative remedy.

In addition to awarding control of the proceeding to the member, the court has the power to order the directors to provide information or assistance and can decide to what extent the company will bear the cost of proceedings. Settlement or compromise of a derivative action requires court approval.

Actions against the company
A member of a company may bring an action against the company for breach of a duty owed by the company to him as a member. Where other members are likewise affected, the court may appoint a member to act for them in a representative capacity.

Unfair prejudice remedies
A member of a BVI company has locus standi to seek the winding up of a company on just and equitable grounds. Under the IBCA regime, this often represented the only remedy available to a disgruntled minority shareholder.

It seems that the draftsman of the Insolvency Act 2003 anticipated the introduction of section 459-461-style relief in the projected new company legislation, as it provides that the court may refuse to appoint a liquidator on just and equitable grounds where it is of the view that “some other remedy is available to the applicant”.

This will presumably result in a position similar to that in England: the court will be unwilling to grant the somewhat destructive remedy of winding up on the application of an oppressed minority shareholder who could, instead, have invoked the companies legislation and sought a buyout or other more commercial remedy.

It will, indeed, hardly make sense for a disgruntled member of a BVIBC to apply pursuant to the Insolvency Act for the appointment of a liquidator on just and equitable grounds. In circumstances where such an order would be appropriate, the court may appoint a liquidator on an application brought under Part XA of the BVIBCA.

Relief for unfair prejudice
Relief may be sought under the BVIBCA where the affairs of the company have been, are being,or are likely to be, conducted in a manner that is, has been, or is likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to the member in his capacity as such.

If the court considers it just and equitable to do so, it may grant a member’s application and grant any order it sees fit, including one or more of the forms of relief specified by the BVIBCA.

The full range of remedies specified in the BVIBCA comprises:
#an order that the company or any other person acquire the member’s shares;
#an order that the company or any other person pay compensation to the member;
#an order regulating the future conduct of the company’s affairs;
#an order amending the memorandum or articles of the company;
#an order appointing a liquidator of the company;
#an order to rectify the records of the company; and
#an order setting aside the decisions or acts of the company or its directors that are in breach of the memorandum or articles.

In considering an unfair prejudice application, it is likely that the BVI court would follow the English courts in accepting that an exclusion from management, where there was a legitimate expectation to participate, can prejudice an applicant qua member.

Thus, actions taken in reliance upon the strict rights of the majority shareholder in a BVI company may be far more amenable to challenge in the typical joint-venture scenario than was the case under the IBCA. n
James Hilsdon is head of the litigation practice at Appleby Spurling Hunter