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29 April 2010
New Commercial Court rules now apply in the British Virgin Islands.(1) The new rules deal with a number of procedural points, including case management conferences and pre-trial reviews, and also include significant changes to the previous High Court costs regime.
There continue to be numerous issues surrounding the creditor/investor debate in fund litigation, and there have been a number of notable cases. In Citco Global v Y2K Finance a winding-up petition was brought on two grounds. The first was that the fund had made alleged improper redemption payments before the suspension of redemptions. The Commercial Court held that it would not permit minority shareholders to wind up a company on the basis that they had, or might have, claims against the directors, as this would be inconsistent with the rule in Foss v Harbottle.(2)
The second ground was based on a loss of substratum argument. By the time of the hearing, the fund agreed that it should be wound up; however, the directors wanted the opportunity to realize assets, repay investors and then enter into a voluntary liquidation procedure. Although the court preferred a wide definition of 'loss of substratum', it refused to make a compulsory winding-up order as the directors were acting within the articles of association in making repayments and any investor would have the more appropriate unfair prejudice remedy.
The second major case was Western Reserve International Ltd v Reserve International Liquidity Fund, which gave specific guidance on the creditor/investor issue. Although cases depend on the individual articles of association and other documents, the court provided useful guidance on this area and on the operation of Section 197 of the Insolvency Act, which provides that:
"A member, and a 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, whether by way of dividend, profits, redemption proceeds or otherwise, but such sum is to be taken into account for the purposes of the final adjustment of the rights of members and, if appropriate, past members between themselves."
In Reserve the investor argued that it had redeemed, and therefore was a creditor and able to wind up the fund. The court decided that the effect of the articles was that if a redemption request was received before 5:00pm on a dealing day, the redemption of the investor's shares was completed on that day. The court noted that the redemption was submitted before any suspension period and the investor had therefore become a creditor for the unpaid redemption proceeds in its capacity as a seller entitled to a price of shares. Accordingly, Section 197 did not preclude the petition. The decision has been appealed (for further details please see "Commercial Court rules on status of redeemed shareholder").
In another recent decision, Barefield Nominees Limited v Westford Special Situations Fund Ltd, the BVI court held that a feeder fund electing to redeem an investor in specie must provide quantifiable assets and that, in this instance, a share in the master fund would be inadequate. The decision was fact specific but is an important reminder to funds seeking to make redemption payments in kind to be wary as to exactly what is being proffered in satisfaction.
In the recent case of Black Swan Investment ISA v Harvest View Limited the BVI High Court held that it was within its discretion to grant a standalone freezing injunction in support of foreign proceedings. It was previously thought, by reason of the English House of Lords decision in The Siskina,(3) that the court could not grant a freezing injunction unless the injunction was made in support of a claim which the court granting it had jurisdiction to enforce by final judgment - often referred to as "a substantive cause of action". However, the BVI court held that such an interpretation of The Siskina was incorrect, and that what Lord Diplock had said in that case was that the English High Court had no power to grant an injunction except in protection or assertion of some legal right which it has jurisdiction to enforce by final judgment. As has subsequently been held in the English case of Channel Tunnel Group v Balfour Beatty Ltd,(4) this formulation does not preclude the English court from granting an interlocutory injunction ancillary to a claim for substantive relief to be granted by a foreign court or an arbitral body. Citing the dissenting judgment of Lord Nicholls in the Privy Council decision of Mercedes Benz Ag v Leiduck, it was held that since there was no reason in principle why a claimant could not enforce a foreign monetary judgment in the BVI courts, there seemed no logical reason why it could not make a claim for ancillary relief to a foreign award or judgment, such as a freezing injunction.
This decision has particular relevance in offshore jurisdictions because the business of companies incorporated in such places is invariably transacted abroad and disputes between parties that own them and others are often resolved abroad. The BVI court noted that it would be "highly detrimental" to the reputation of an offshore jurisdiction if potential judgment creditors seeking to have resort to judgment debtors' assets located in such jurisdictions were required first to commence substantive proceedings in order to claim ancillary relief. It was noted that similar conclusions have been reached by the Court of Appeal of Jersey and Guernsey.
For further information on this topic please contact Phillip Kite or Andrew Thorp at Harney Westwood & Riegels by telephone (+1 284 494 2233), fax (+1 284 494 3547) or email (email@example.com or firstname.lastname@example.org).
(2) (1843) 2 Hare 461.
(3)  AC 210.
(4)  AC 334.
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