Small islands, big cases

 MARKET VIEW – LITIGATION 

Maples and Calder’s BVI managing partner, Arabella di Iorio, looks at complex commercial litigation in the British Virgin Islands

We all know the oft-repeated statistics: the hundreds of thousands of British Virgin Islands (BVI) incorporated companies, the hedge funds, the limited partnerships, the captive insurance companies. Those of us fortunate enough to live here also know that the BVI is among the most beautiful places on earth. But what is just as often forgotten is that the development of the BVI as a sophisticated offshore financial centre has gone hand in hand with its development as a jurisdiction able to handle the most complex international litigation.

The foundation for the Islands’ success is of course its financial services legislation, and coincidentally 2014 sees the 30th anniversary of the International Business Companies Act 1984. As was said in a recent celebratory speech: ‘It is, and has been, the very essence of the BVI advantage.’ Since then, the Insolvency Act 2003 and the new BVI Business Companies Act 2004 have come into force, cementing the Islands’ reputation for flexible, user-friendly legislation that does the job it needs to do. A very welcome addition on 1 October 2014 will be a thoroughly modern Arbitration Act, which follows on the heels of the BVI’s accession to the New York Convention and which is designed to add Tortola to Paris, London and New York as an international arbitration centre. Let’s face it, where would you rather be for a six-week arbitration in November?! Last but not least in setting the scene for litigation, one should not forget that the BVI has been providing mutual legal assistance for over 20 years, it is a party to a significant number of tax information exchange agreements (TIEAs), and also has a regulator-to-regulator assistance scheme; a comprehensive regime to combat terrorism and terrorist financing; and a Financial Services Commission with specific powers of enforcement, particularly in relation to requests from foreign regulatory authorities.

‘Let’s face it, where would you rather be for a six-week arbitration in November?!’

Onto, then, the role of the BVI courts. A member of the Eastern Caribbean Supreme Court, the BVI has always had a greater diet of civil commercial litigation than the majority of the other member states, and its courts have developed accordingly. That development culminated in 2009 with the establishment of the Commercial Division of the Eastern Caribbean Supreme Court, headquartered in Tortola. The Commercial Court has ever since handled commercial claims with a value of at least $500,000 (although the Commercial Court judge can waive this requirement), and during its five years in operation has handled some of the largest and most ground-breaking cases in the core areas of finance and insolvency.

Its impact on the jurisdiction cannot be underestimated. It was about a decade ago that a large commercial trial had to be adjourned because the Islands ran out of paper and lever arch files – that sort of thing is unthinkable today, in a country that is well used to month-long trials, evidence being given by video link and regular telephone hearings. A number of Civil Procedure Rules have either been adapted for Commercial Court cases, or specifically introduced. The impact on the quality of the legal profession has also been significant, and BVI lawyers are now drawn from top-tier firms onshore and from the English and West Indian Bars. Less and less reliant on onshore counsel, BVI firms can now field top-quality teams, including specialist advocates, and no longer accept a ‘post box’ role, but demand full strategic involvement in their cases.

A snapshot of those cases over the last few years reveals authorities of great legal and commercial significance. Picking only a few is difficult, but from a global litigation perspective it must be hard to beat the seven-year-long battle between Turkish conglomerate Cukurova Holding AS and the Alfa Group of Russia for control of Turkcell, the largest mobile telecommunications company in Turkey. Spawning eight hearings before the Privy Council and well over double that number in the BVI, the case remains the principal authority on the scope of the 2003 Financial Collateral Arrangements (No 2) Regulations, and on the remedy of appropriation. Of equal, if not greater, significance is the ground-breaking ruling that relief from forfeiture is available in equity to relieve a collateral provider from an appropriation, and that the court has equitable jurisdiction to set the terms and conditions on which relief will be granted. This is a case with a huge impact on global financial markets.

Of equal impact is the recently decided clawback litigation between redeemed investors in the Madoff-exposed BVI Fairfield Funds, and the liquidators of those funds. The decision of the Commercial Court in rejecting the liquidators’ entitlement to claw back over a billion dollars in redemption proceeds on the basis that good consideration had been provided by the redeemers surrendering their shares in the funds was upheld by the Privy Council in April 2014. The liquidators’ claims failed on the additional ground that the Funds’ net asset value (NAV), based on which the redemptions proceeds were calculated, had been certified by the Funds and was final and binding. The Privy Council held that the Funds were obliged to pay the NAV determined by the directors at the time of redemption, and set out in the certificates, and not the NAV based on subsequent information about the Madoff fraud which was not known at the time. The decision would have been welcome news not only to the majority of the world’s largest banking institutions, but also to other offshore investment fund jurisdictions where the prospect of having to unravel years of subscriptions and redemptions with the benefit of hindsight would be a recipe for chaos and uncertainty.

There is obviously a close link between some of the big commercial cases and the insolvencies which gave rise to them. The Commercial Court has a sometimes difficult path to tread here, supervising liquidations while at the same time determining proceedings it may have permitted the liquidators to bring. No car crashes so far, as demonstrated by the liquidations of the Fairfield and Kingate Funds, to name but two, and the litigation pursued by their respective liquidators. Speaking of which, the Privy Council will shortly consider another BVI case: the appeal by Stichting Shell Pensioenfonds (SSPF) against the Eastern Caribbean Court of Appeal’s decision to grant the liquidators of Fairfield Sentry an anti-suit injunction restraining SSPF from pursuing proceedings in The Netherlands. The injunction was based on the court’s finding that Shell had voluntarily submitted to the jurisdiction of the BVI court by filing a proof in the BVI liquidation of Fairfield and in so doing had elected to be bound by the insolvency scheme of the BVI. The Commercial Court judge had refused to grant the injunction and it will be interesting to see whether the principles laid down in In re Vocalion (Foreign) Ltd [1932] are upheld or rejected by the Privy Council. Is it too strong a thing to prevent a foreigner from suing in its home court, or is it just another aspect of cuddly cross-border co-operation in the imposition of the pari passu principle?

‘It was about a decade ago that a large commercial trial had to be adjourned because the Islands ran out of paper and lever arch files – that sort of thing is unthinkable today.’

This is not to say that the BVI courts have a restricted diet of finance and liquidations. BVI trusts have been on the map for decades, although arguably the jurisdiction’s most important case remains T Choithram International SA v Pagarani [2001], in which it was held that a trust was validly constituted over property even though legal title had not been transferred to all the trustees. Minority shareholder complaints, derivative actions and fraud cases are no strangers to the Commercial Court.

One should also remember the BVI courts’ arsenal of interim measures, specifically honed to facilitate the needs of offshore litigation, including ‘Black Swan’ freezing orders, the appointment of receivers, and the development of the Norwich Pharmacal jurisdiction to cater for the fact that BVI companies’ records are not public, but held by their registered agents. Although the registered agents are bound by a duty of confidentiality and are highly unlikely to be anything other than innocent third parties as far as wrongs committed by the company are concerned, Norwich Pharmacal orders can, in appropriate circumstances, nevertheless be granted against them.

And so we come to the end of an era, as the first judge of the Commercial Court, Edward Bannister QC, approaches retirement at the end of March 2015. His legacy will be enormous and the jurisdiction waits for news of his successor with baited breath.

© MAPLES AND CALDER

This article is intended to provide only general information for clients and professional contacts of Maples and Calder. It does not purport to be comprehensive or to render legal advice.