The British Virgin Islands have their own legislative and
judicial framework, but a High Court staffed with only two
resident judges and no formal system of law reporting.
These statistics belie the territory's status as a leading
financial centre. It has one of the most progressive
legislative regimes for companies, with no taxes on its
business companies and low rates for domestic companies. No
taxes are payable on wealth inheritance, capital gains, or
capital transfers, nor are there any estate or death duties. In
the past few years, many of the leading international offshore
firms have opened in the territory; it now has a wealth of
talent in both the legal and the financial sector.
The BVI are now regarded by many as the offshore
incorporation centre of choice. Over 800,000 companies have
been incorporated within their shores, including a significant
number of mutual funds and hedge funds, captive insurance and
trust companies. It is now the world's second largest
jurisdiction for the incorporation of hedge funds. It is also a
jurisdiction particularly favoured by those operating in
Russia, Cyprus, the Middle East and Asia.
The legal system
The British Virgin Islands remain a British overseas
territory, with the British government retaining responsibility
for their foreign policy and defence. Executive authority
invested in the Queen is exercised on her behalf by the
governor, currently His Excellency, Mr. David Pearey.
Otherwise, it is a largely self-governing jurisdiction, with
its own constitution (adopted in 2007 by the Virgin Islands
Constitution Order) and parliament.
The court system in the BVI consists of a Magistrates'
Court, a High Court and a Court of Appeal, with the final court
with appellate jurisdiction being the Privy Council in London.
The Superior Court of Record for the BVI is the Eastern
Caribbean Supreme Court (ECSC), which also serves as the
Superior Court of Record for two other British overseas
territories (Anguilla and Montserrat) and six independent
member states of the Organisation of Eastern Caribbean States
(OECS), namely Antigua, Barbuda, the Commonwealth of Dominica,
Grenada, St Christopher and Nevis, Saint Lucia, St Vincent and
The ECSC consists of two divisions, the Court of Appeal and
the High Court of Justice. The Court of Appeal is an itinerant
court whose sittings rotate between the nine members of the
OECS. Its rules are largely modelled upon the English civil
procedure rules. The BVI also has a magistrates' court, from
which appeals lie direct to the Court of Appeal. The
magistrates' court has both a criminal and a petty civil
In what is widely seen as an important development, not just
for the BVI but also for the wider Eastern Caribbean region,
the BVI will acquire its own commercial court in 2009. The
Commercial Court, which implements one of the recommendations
of a report prepared by a team from Essex University, UK, will
become a specialist division of the ECSC, with a jurisdiction
over commercial cases issued in the various member states of
the OECS. The building for the new Commercial Court is still
under construction, but its judge (Edward Bannister QC) has
been appointed and is expected to sit from May 2009.
2008 has been an interesting barometer to the global
The year started 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 of the year, on January 29 2008, was
IManagement Services Limited v. Cukurova. That was a
claim based in conspiracy, abuse of civil process and malicious
falsehood arising out of the alleged forgery of an arbitration
agreement, on the back of which IManagement obtained an award
in Russia. Then in July 2008 came the BVI sequel to the long
running battle between Tajik Aluminium and Oleg Deripaska's
Rusal Group, where Tajik sought to resist a stay on forum non
conveniens grounds on the basis that the Russian Arbitrazh
Courts were prone to political interference and that Tajik
would not receive substantial justice in Russia.
June 20 2008, saw judge Hariprashad-Charles provide guidance
in relation to the treatment of costs incurred by non-BVI
admitted lawyers in Michael Wilson & Partners v.
Temujin & Others (MWP). Michael Wilson & Partners,
a Kazakhstan based law firm, was ordered to pay $395,085.84
after capitulating at the door of the Court on its application
to continue a receivership.
That litigation had come before the BVI Court on a number of
occasions over several years, and had produced a number of
significant judgments. Most notable is that of the Court of
Appeal discharging the receivership orders made ex-parte and
continued at the return date against the fifth and sixth
defendants, Norgulf Limited and Incomeborts Limited.
MWP is a case in which there were parallel proceedings in
multiple jurisdictions, arbitration proceedings in London and
allegations concerning the misuse of BVI corporate structures,
with diffuse (and generally) poorly evidenced allegations
against what appears to have been a growing list of defendants.
It is apparent from the reports that the central allegation in
Norgulf changed over time (there were five
reformulations of the Statement of Claim). At its heart was the
allegation that various former partners of MWP had breached
their fiduciary duties to MWP, that the various respondents had
assisted those parties by knowingly receiving and attempting to
retain the proceeds of those breaches. The key allegation
against Norgulf and Incomeborts was particularly striking
that the beneficial owner of those two companies was not
in fact the beneficial owner at all, but that the ultimate
beneficial owners were the former partners.
The fact that the registers of shareholders and directors
are not publicly available perhaps fostered this suspicion, but
it was persisted in even after powerful evidence to the
contrary was produced. The Court applied its earlier decisions
in Audubon Holdings Limited v. Treasure Island Hotel
Company and Spectrum International Holdings v. Modern
Perfect Developments and held that the test to be applied
on an application to appoint receivers was whether or not there
was a serious issue to be tried.
In a robust judgment, the Court of Appeal discharged the
receivership orders. It ruled that its earlier decisions, upon
which the first instance judge was bound, were wrong. They had
been based on an understanding of the law that had been
overtaken by the English decision in Ninemia Maritime
Corporation v. Trave. The Court then went on to conduct a
careful analysis of the evidence adduced by the Applicants and
concluded that it fell far short of the test for appointing a
receiver. MWP's case, it concluded, was based on "speculative
inferences" largely unsupported by evidence and that such
evidence as there was "is at best a litany of speculative
assertions.... [moreover] sparse on any detail relating to the
dissipation of assets." It is perhaps an unhappy feature of
this case that the judge was not told at the ex-parte stage
that the draft order which she was being asked to approve did
not contain an undertaking in damages (although an unfortified
undertaking was later given).
On December 30 2008, judge Joseph-Olivetti discharged
ex-parte receivership and freezing injunctions in the
well-publicised Dannone litigation (Dannone v. Golden
Dynasty Enterprises & Others), principally on the
grounds that the case had not been presented fairly by leading
counsel for the claimants at the ex-parte stage.
It seems likely, given the BVI's standing as one of the
leading centres for the incorporation of hedge funds, that the
litigation landscape will change in the wake of current
economic conditions. A number of funds exposed to the Madoff
fraud were incorporated in the BVI. The fallout from that fraud
has yet to come before the BVI courts.
One of the most enduring legacies of the financial crisis
from 2008 may prove to be judge Joseph-Olivetti's judgment on
November 14 2008 in SV Special Situations Fund Limited v.
Headstart Class F Holdings Limited. The judgment begins
with a timely reminder, not least given the discovery of the
Madoff frauds only weeks later:
"Hedge funds are sophisticated investment vehicles
reminiscent of hedgehogs or sea urchins which tend to prick
badly if not carefully handled. Perhaps John C Bogle in the
foreword to his book Bogle on Mutual Funds refers to the risks
of dealing with such bodies more elegantly when he adverts to
the Surgeon General's caveat on cigarette packages
'warning, this product may be dangerous to your health'."
In SV Special Situations, the fund had applied to
set aside a statutory demand that had been served by a
redeeming member. It took what was described as the preliminary
point that Headstart did not have standing to make the demand
because it was not a creditor for the purposes of the BVI
Insolvency Act 2003. Section 197 of the BVI Insolvency Act
provides, so the argument went, that "a member, or past member
of a company may not claim in the liquidation of the company
for a sum due to him in his character as a member..."
The Court rejected this argument. It concluded that Section
197 had no application before a liquidation was underway and
that Section 197 "only needs to be adverted to after the
liquidation is underway and the liquidator is considering what
claims to honour". The Court's alternative, and perhaps
stronger, analysis was that the redeeming members claim did not
accrue in its capacity as a member, but pursuant to a liability
arising in contract.
A similar approach was taken by the court in Bermuda in
Stewardship Credit Arbitrage Fund. Applying the
decision of a Court in New South Wales in Basis Capital
Funds Management Limited v BT Portfolio Services the Court
held that "once redemption has taken place, the position of the
former unit holder is transmuted from unit holder to creditor
if the redemption price is unpaid."
But this was not the approach of the Cayman Islands Court of
Appeal in re Strategic Turnaround Mastership
Partnership where a general suspension of redemptions was
held to bind investors whose redemption date had passed.
The effect of the suspension of redemptions upon a redeeming
member was not argued in the BVI SV Special Situations
fund case, nor was it in issue. The creditor was on
particularly strong ground in SV Special Situations
Fund because the fund had signed an agreement letter that
acknowledged the redemption and promised to make payments on
certain dates. The Court was unimpressed with the fund's
attempt to renege on that letter by arguing that it did not
refer to a payment of cash, but could (properly construed)
instead meet its obligations through securities. The Court
noted that the agreement letter had been signed by both
parties, that subsequent correspondence made it "abundantly
clear" that the fund would meet its redemption obligations in
cash and that there was evidence that Headstart had relied on
that agreement, and various subsequent representations to that
effect, to its detriment.
Quite apart from the fact that SV Special Situations
Fund has yet to come before the Court of Appeal, it seems
inevitable that it will not be the last word of the BVI court
on the rights of redeeming investors. When times were good, the
Court was not troubled by failure to meet redemption requests.
Now that economic conditions have deteriorated, and funds are
suspending redemptions en masse, further litigation is surely
Andrew Willins is an associate within the litigation
and insolvency group of Appleby's BVI office. His
practice focuses on fraud and asset tracing,
shareholders disputes and insolvency.
Prior to joining the group in 2008, he practised for
a number of years at the Chancery Bar in London. He has
appeared in every division of the English High Court,
in county courts throughout the country, three times in
the Court of Appeal and in various specialist
tribunals. Since joining Appleby, he has appeared
before the Court of Appeal of the Eastern Caribbean
Supreme Court in the BVI and on a regular basis before
its High Court.
Andrew graduated from the University of Wales,
Aberystwyth in 1999 with an LLB (Hons) and completed
his Bar Vocational Course at the Inns of Court School
of Law in London in 2000. He was called to the Bar of
England and Wales in 2000.