Corporate law in the BVI is undergoing a change, with insolvencies becoming a particular focus, says Mark Forté

British Virgin Islands (BVI) corporate law is about to see a transformation. As of 1 January 2007, the BVI Business Companies Act 2004 becomes fully effective. On that date all existing companies registered under its predecessor, the International Business Companies Act, will be automatically reregistered under the new act. At first blush one can be forgiven for considering that the act is only of interest to corporate lawyers, yet certain of its provisions, linked with the recent approach of BVI courts, suggests that litigators will find it very fertile ground as well.

Of particular interest is Part XI: Members’ Remedies. This represents part codification, part development of the law in this jurisdiction. Five statutory remedies are included within the regime:

  • restraining/compliance orders;
  • derivative actions;
  • personal actions by members;
  • representative actions; and
  • remedies for ‘prejudiced members’.

    Restraining/compliance orders

    The act introduces the concept of a restraining or compliance order. The provision is striking in its simplicity. If a company or director engages in, or proposes to engage in, conduct that contravenes the act or the memorandum or articles of a company, they can be restrained from doing so. In essence, it provides a simple statutory route to enforce a member’s/the company’s common law rights. Provision is included for consequential relief and for interim relief.

    Derivative actions

    The second form of remedy is one familiar to English corporate lawyers, namely the derivative action. Generally, the statutory scheme codifies the existing common law position, leave of the court being required to bring such an action. However, the act goes on to prescribe the matters that the court must take into account when considering such a leave application. These include the good faith of the member, prospects of success of the action, a costs/benefit analysis and whether alternative relief is available.

    Additionally, leave will be only be granted if the court is satisfied that the company does not itself intend to participate actively in the action and it is in the interests of the company that the conduct of the action should not be left to the directors or to the determination of the shareholders or members as a whole.

    The statutory provision expressly replaces the common law right. Accordingly, the statutory criteria must be applied. Given the need to obtain leave, it is likely that the significant skirmishes may well occur at the leave stage. In particular, given the mandatory list of statutory criteria for the obtaining of leave, it can readily be anticipated that such applications may give raise to contested and lengthy arguments. However, given the creation of the last remedy that we consider, we must ask how attractive this route will be.

    Personal and representative actions

    The next two statutory remedies are relatively straightforward. The act simply provides that a member of a company may bring an action against the company for breach of duty owed by the company to them as a member. This represents a simple codification of the common law position. There are no further restrictions or provisions in relation to a personal action.

    The concept of representative actions receives statutory attention under the act, which empowers a court to make an order appointing one member as representative of all or some of the members having the same interest in relation to the proceedings against the company. Orders that may be made include orders controlling the proceedings, costs of the proceedings and directions as to the distribution recoveries.

    Remedies for prejudiced members

    It is the last statutory remedy that is the most revolutionary for the BVI. Section 184I is simply headed ‘Prejudiced Members’. It provides that a member of a company who considers that the affairs of the company have been, are being, or are likely to be conducted in a manner that is oppressive, unfairly discriminatory or unfairly prejudicial to them in that capacity, may apply to the court for an order seeking relief.

    The statutory guidance provided as to when the court should exercise its power to give relief is simple: namely, when it is just equitable to do so. Eight non-exclusive remedies are provided, including the appointment of a receiver and amending the memorandum or articles of the company. Although in general terms this provision resembles that which is well established in the English regime, it is truly revolutionary by BVI standards.

    Formerly no such remedy existed. A disgruntled shareholder was compelled to activate the draconian option of seeking a winding-up order on the just and equitable grounds – frequently not the result that any party wished for. Such applications have featured frequently in the courts of the BVI. The availability of only this sledgehammer remedy ill-served the requirements of a sophisticated asset-holding jurisdiction. Accordingly, the introduction of a flexible statutory scheme is to be welcomed.

    It will be appreciated that the BVI provisions are somewhat different from those to be found in the UK’s Companies Act. Although concepts of ‘oppression’ and ‘unfair prejudice’ are familiar, ‘unfair discrimination’ is new. The question as to how a BVI court is likely to apply this brand-new statutory remedy will therefore likely be raised.

    We can perhaps derive valuable insight from two recent insolvency based decisions in this jurisdiction. In Metalloyd Ltd v Burwill Resources Ltd (2006) the BVI High Court accepted the applicant’s submissions that there was no residual right to attend court, having failed to set aside a statutory demand under Section 156 of the Insolvency Act 2000 and argue that the respondent was not in fact insolvent and had a defence to the debt alleged. The statutory time period in the BVI to set aside a statutory demand is 14 days. Moreover, under the Insolvency Act, the court is expressly precluded from extending this period.

    Despite the fact the that the debtor company argued that regard should be had to UK jurisprudence on the interpretation of the relatively new statutory provision in the BVI, the court firmly eschewed such a course. Rather, it adopted the stance that the statutory regime was a new one, designed to meet the needs and operation specifically of the BVI. Accordingly, English lines of authorities, based as they were upon the English provisions, were irrelevant to the question of the interpretation of the BVI statute.

    The court did not even regard them as being persuasive. The decision has rightly been described as landmark for this jurisdiction. Modern BVI judges pay a healthy, and not a slavish, respect to UK authorities. In circumstances where the BVI has enacted different legislation to that of the UK, and for that matter other common law jurisdiction such as Australia, one can expect the BVI court to be open to fresh arguments on interpretation of BVI statutes.

    To similar effect is the decision in Asiacorp Development Limited v Greensalt Limited (2006). Here the BVI High Court recently emphasised the fact that, when interpreting a new BVI statutory provision (Section 168 of the Insolvency Act, which provides that the application to appoint a liquidator is deemed dismissed if not determined within six months of its issue), it would not shy away from a firm and literal interpretation of the provision. There is no reason why this form of approach will not be extended to the interpretation of the Business Companies Act generally, and in particular in relation to the new provisions highlighted above.

    It has taken two years for authorities testing the Insolvency Act to emerge from the BVI courts. It is likely this long-awaited relief and general elevated confidence in the act will generate case interpretation of these new provisions by this time next year. There is confidence that this will be a well-utilised and successful option for applicants seeking relief short of the ‘nuclear’ option.Practitioners can expect an interesting 2007 as these particular Caribbean waters are charted.

    Mark Forté is head of litigation at Conyers Dill & Pearman+ continued