Asset Tracing Tools in the British Virgin Islands: What is Available?
The law and practice relating to the international tracing of assets is well-established in the BVI. This article is a practical summary of the various asset tracing tools available in the jurisdiction. The article does not set out a full exposition of the pertinent legal principles but, instead, is intended to give onshore common law and civil law lawyers and insolvency practitioners an overview of the various asset tracing tools available so that they can work with their clients and their BVI Counsel to identify possible avenues of assistance. The article covers the following:
Access to Documents
Professional and lay clients alike tend to be of the view that it is difficult to obtain documents and information about BVI companies. There are, in fact, many ways you can access documents and information, as more fully set out in this article. Shareholders have a statutory right of access to certain documents and directors, who must monitor the fiduciary duties the owe the companies, are entitled to see all of the company’s documents and records.
A liquidator is a third-party officer of the BVI court that is appointed in place of the company’s directors to realise the company’s assets and to distribute the proceeds of those assets to the company’s creditors, with any surplus going to the company’s shareholders. An application can be made to appoint a liquidator of a BVI company where it can be demonstrated that the company is insolvent or where the court can be persuaded that it is just and equitable to appoint a liquidator of the company. Applications to appoint a liquidator on the just and equitable ground are often sought in shareholder dispute cases: see this article for further information. The threat of making an application to appoint liquidator is a significant one for a BVI company because the filing of the application can have a significant and negative impact on the company’s contracts and business, and the appointment of a liquidator will effectively result in the dissolution of the company as well as a full review of the company’s transactions, a thorough investigation into the company’s business and affairs, and a review of the decisions of its directors.
The BVI insolvency legislation provides that a BVI company’s members may appoint a liquidator of their company by way of a qualifying resolution. A qualifying resolution is a resolution that is passed by a majority of 75%, or if a higher majority is required by the company’s memorandum or articles of association, by that higher majority, of the votes of those members who are present at the meeting and entitled to vote on the resolution. This voting mechanic can be used, for example, by liquidators of parent companies to appoint themselves to the boards of subsidiaries for the purposes of taking control of those companies and using their broad powers under the insolvency legislation to investigate them for the purposes of maximising returns to creditors.
If a BVI company is insolvent and it is likely that a liquidator will be appointed, it is possible to make an application for the appointment of a provisional liquidator of the company to take control of the company away from its directors. A creditor may choose to appoint a provisional liquidator if it believes that there is a risk to the company’s assets that will ultimately impact its recoveries in a liquidation. A shareholder may choose to appoint a provisional liquidator if it believes that the company’s board is not acting in the company’s best interests, or if they are acting improperly. An application to appoint a provisional liquidator can be made without notice to the company, to prevent the company from taking steps to defeat the purpose of appointing a provisional liquidator.
Following their appointments, liquidators are given broad statutory powers to ‘get in’ a company’s assets for the purpose of distributing realisations to the company’s creditors. The insolvency legislation permits them to bring the following claims for a broad range of remedies for the ultimate benefit of the company’s creditors:
- Unfair preferences: where the company has entered into a transaction with a creditor when it is insolvent or where a transaction has caused the company to become insolvent, and the transaction has the effect of putting the creditor into a position which, in the event of the company going into insolvent liquidation, would be better than the position the creditor would otherwise have been in if the transaction had not been entered into, the liquidator can make an application to the court for a remedy.
- Undervalue transactions: such a claim will arise where a) the company makes a gift to a person or otherwise enters into the transaction with a person on terms that provide for the company to receive no consideration; or b) the value of the consideration provided to the company, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company.
- Voidable floating charges: a floating charge is potentially voidable where it is entered into with a connected person within the period of two years, or any other person within the period of six months, prior to the onset of insolvency and ending with the appointment of a liquidator, at a time the company was insolvent, or where it caused the company to become insolvent.
- Extortionate credit transactions: a liquidator can challenge such transactions where the company enters into a transaction for, or involving the provision of, credit to the company if, having regard to the risk accepted by the person providing the credit: a) the terms of the transaction are or were such as to require grossly exorbitant payments to be made in respect of the provision of credit; or b) the transaction otherwise grossly contravenes ordinary principles of fair dealing.
In certain circumstances set out below, liquidators can bring claims against directors, former office holders, and persons concerned in the promotion, formation, management, liquidator or dissolution of the company for a range of orders for the ultimate benefit of the company’s creditors:
- Summary remedy against delinquent officers and others: liquidators have the power to bring proceedings against a person who (a) is or has been an officer of the company; (b) has acted as liquidator of the company; (c) has acted as administrative receiver, supervisor, or interim supervisor of the company; or (d) is or has been concerned in the promotion, formation, management, liquidation, or dissolution of the company, if satisfied that such person has misapplied or retained or become accountable for any money or other assets of the company or has been guilty of any misfeasance or breach of any fiduciary or other duty.
- Fraudulent Trading: where a liquidator is able to satisfy the court that, at any time before the commencement of the liquidation of the company, any of its business has been carried on with the intent to defraud creditors of the company or creditors of any other person or for any fraudulent purposes, the court may declare that any person who was knowingly a party to the carrying on of the business in such manner is liable to make such contribution to the company’s assets as it considers proper.
- Insolvent Trading: where the court is satisfied that at any time before the commencement of the liquidation of the company a director or former director of the company, who was a director of the company at the time, knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, the liquidator may ask for an order that the person concerned make such contribution to the company’s assets as the court considers proper.
Appointment of Receivers
There are a number of circumstances justifying the appointment of receivers: a) secured creditors will typically have a power to appoint receivers in their security documents and the receiver, once appointed, will take control of the secured asset (usually shares in the BVI company) as agent of the company but for the benefit of the secured creditor; b) receivers can be appointed by the BVI court over a BVI company or its assets to maintain order or to preserve the value of the assets of the company pending the resolution of a dispute; c) receivers can be appointed by way of equitable execution of a judgment to aid enforcement; d) where a creditors ability to recover what it is owed is jeopardised by the action of a BVI company’s directors, it may be possible to appoint a receiver to investigate the company’s business and affairs and review its transactions. By appointing a receiver of the shares of the BVI company, then so long as the company’s constitutional documents permit, the receiver should have the power to change the company’s board to take control of its subsidiaries.
Freezing injunctions are orders that the Court makes to prevent a party from dealing with its assets where there is a risk of disposal of those assets, so a counterparty has assets to enforce against if it succeeds with a claim. Freezing injunctions can be obtained in the BVI in aid of foreign proceedings without the need to issue proceedings in the BVI. In appropriate cases, freezing orders can also be made against third parties. Freezing injunctions can be obtained without notice to the party whose assets are sought to be frozen but will require the application to give the BVI court a cross-undertaking in damages. Where there is demonstrable urgency, a freezing order can be obtained at short notice.
Norwich Pharmacal Orders
A Norwich Pharmacal order is an order requiring an innocent third party that has been caught up in a wrongdoing, to give up documents and/or information to the applicant. Every company in the BVI must have a registered agent. The registered agent is a third-party regulated agent that has many different functions including maintaining the company’s statutory records and details of the company’s ultimate beneficial owners. The BVI courts have consistently held that a company’s registered agent can be the subject of a Norwich Pharmacal Order and be required to give up a BVI company’s confidential records, including details of the BVI company’s ultimate beneficial owners. Applications for Norwich Pharmacal orders can be made without notice to the target company and they can be made with a “gagging order”, which prevents third party from telling the target company that it is has been made the subject of such an order. Like freezing orders, applications for Norwich Pharmacal orders can be made without issuing formal proceedings in the BVI and they can be made at short notice where there is demonstrable urgency.
Orders in Aid of Foreign Proceedings
In appropriate cases the BVI court will grant freezing orders and Norwich Pharmacal order in aid of foreign proceedings. If the circumstances justify it, those applications can be made urgently and without notice to the other side.
The BVI has a full suite of enforcement tools available to judgment debtors to recover judgment debts including: a) oral examination: it is possible to obtain an order from the BVI court to examine an officer or former officer of a judgment debtor company to assist with enforcement; b) charging order: a charging order is a way of securing a judgment debt by imposing a charge over stock or other personal property; c) stop notice: a stop notice can be obtained by any person with a beneficial interest in the shares of a BVI company to prevent any dealings with those shares without first giving the applicant for the stop notice of the intended dealing; d) garnishee order: this is an order requiring a person that owes the judgment debtor money to pay that money to the judgment creditor; e) judgment summons: this is an order committing a judgement debtor for non-payment of a debt; and f) writ of execution: this is an order for the seizure and sale of goods, the sequestration of assets, or a writ of delivery of specified goods or the recovery of goods or their assessed value.
Disclosure of Documents and Pre-Action Disclosure
In the course of litigation, the parties reach a point where they are required to disclose details of all relevant documents in their possession and control that go to the issues. Following disclosure, the other party has a right to inspect those documents. An order for pre-action disclosure is an order requiring a party to disclose documents before a claim form is issued. Its purpose is to assist a party to plead its case and to encourage the early resolution of cases. There are no specific provisions in the court rules that permit a party to seek pre-action disclosure but it is certainly arguable that the court does have the jurisdiction to make such an order.
Piercing the Corporate Veil
Piercing the corporate veil is the judicial decision to go behind the limited liability of a private company to find the owners and/or directors of the company liable for the company’s wrongdoings. Although it is judicially possible to pierce the corporate veil in this way, the courts have made it clear that they will only do so in “limited circumstances”, such as fraud or the dishonest evasion of pre-existing liabilities through the abuse of a corporate structure.
Enforcement of Foreign Judgments and Arbitration Awards
It is possible to enforce foreign judgments and arbitration awards in the BVI. This article sets out the relevant considerations in full.
Orders in Aid of Foreign Insolvency Proceedings
The insolvency legislation in the BVI provides a comprehensives scheme for assisting foreign office holders, including foreign liquidators and foreign trustees in bankruptcy. This assistance is, however, only given to foreign office holders from certain prescribed jurisdictions. This means that although the BVI court may recognise foreign office holders, it may not be able actively to assist them.
Anton Pillar Orders
Anton Pillar orders, also known as search orders, are orders that can be granted before the issue of substantive proceedings that allow a person to enter a person’s premises to search for and remove property and preserve its as evidence pending trial. Such applications are made without notice to the party that is the target of the application and will only be made if there is good evidence showing that such an order is necessary.
Letters of Request (Letters Rogatory)
The BVI has given statutory effect to the Convention on Taking Evidence Abroad in Civil or Commercial Matters, otherwise known as the Hague Evidence Convention. This means that the BVI court has all the powers necessary to request assistance from foreign courts and tribunals to, for example, examine witnesses, produce documents, and for the inspection, preservation, and detention of any property.
Bankers Trust Orders
Where it is possible to demonstrate that there has been a prima facie case of fraud or a breach of trust and information is required to recover, trace or preserve assets that are the subject of a proprietary claim, it should be possible to obtain a Bankers Trust order for disclosure of that information if the application can also demonstrate that a) the third-party institution is holding assets that belong to the applicant; b) delay may lead to the dissipation of the assets; c) there is a real prospect that the disclosure may lead to the location or preservation of the asset; and d) the information disclosed will only be used for tracing the asset. Unlike an application for a Norwich Pharmacal order, there is no requirement to show that the third-party institution has had any involvement in any alleged wrongdoing.
Knowing Receipt Claims
A knowing receipt claim allows the claimant to recover assets that have been transferred in breach of trust or in breach fiduciary duty. It prevents the recipient of such assets from retaining them for their own benefit where doing so would be unconscionable. Unlike a claim for dishonest assistance, the claimant does not have to show that the defendant acted dishonestly when they received the property. Also see dishonest assistance and constructive trust claims below.
Dishonest Assistance Claims
If it can be established that there has been a breach of trust or other fiduciary relationship, and that third party upon whom liability is to be imposed acted dishonestly in assisting that breach of trust, they will be jointly and severally liable for that breach together with the principal party. These claims are useful where the person assisting is subject to the Court’s jurisdiction and the principal does not have any assets.
Constructive Trust Claims
A constructive trust claim is a claim that arises when a person obtains or holds a legal property right which they should not possess due to unjust enrichment or interference, or due to a breach of trust of fiduciary duty. It is an equitable remedy available to a party that has been wrongfully deprived of their rights. The claimant must show a common intention with the legal owner that it has a beneficial interest in the property (which can arise by express agreement or be inferred from conduct), and that the claimant has acted to its detriment such that it would be inequitable for the legal owner to deny the claimant’s interest.
Resulting Trust Claims
A resulting trust claim is a legal principle that applies when one person holds the legal title to a property, but another person is understood to have the equitable ownership. This can occur in two scenarios: Automatic Resulting Trusts and Presumed Resulting Trusts. An Automatic Resulting Trust arises when a trust fails, and the trustee holds the legal title, while the settlor retains the beneficial ownership. A Presumed Resulting Trust arises when a person voluntarily transfers property or contributes to its purchase price, with the presumption that they did not intend to gift the property unless clearly stated. In certain relationships, a counter presumption of a gift, known as the presumption of advancement, may apply.
Quistclose Trust Claims
Where money is advanced to a borrower for a specific, stated purpose and the borrower accepts the money on terms that the money will be used exclusively for that purpose, the money is impressed with a trust for that purpose and a so-called Quistclose trust is created. If a Quistclose trust is created the recipient is only entitled to use those funds for the specific purpose for which they were advanced and if that purpose fails, the recipient is deemed to hold those funds on trust for the lender. If a liquidator is appointed over the recipient, the trust funds will not form part of the recipient’s estate.
BVI Evidence Act
The BVI Evidence Act 2006 provides that on the application of a party to legal or administrative proceedings, the court may order that party be at liberty to inspect and take copies of any entries in the records of any financial institution for the purposes of legal or administrative proceedings. Such applications are often ancillary to Norwich Pharmacal orders and Bankers Trust orders (see above).
The BVI Conveyancing and Law of Property Act
The BVI Conveyancing and Law of Property Act provides that any person that is prejudiced by a conveyance of property made with intent to defraud creditors can commence proceedings to rescind that transaction.
Money had and Received
An action for money had and received is used by claimants to recover money which has been paid to a defendant in various circumstances, such as (a) by mistake, upon a consideration which has totally failed; (b) as a result of imposition, extortion, or oppression; or (c) as a result of an undue advantage which has been taken of the claimant’s situation. The action is not limited to these categories of cases.
An action for money paid can be brought where money is paid to a third party and the defendant has obtained a benefit as a result. The action is commonly relied on where the claimant pays a third party money to discharge a debt, which a defendant owed to a third party and where the defendant has requested, expressly or by implication, the claimant to make that payment.
If the BVI Court is persuaded that a) the business of a BVI company or any of its affiliates is or has been carried on with intent to defraud any person; b) the company or any of its affiliates was formed for a fraudulent or unlawful purpose or is to be dissolved for a fraudulent or unlawful purpose; or c) persons concerned with the incorporation, business or affairs of the company or any of its affiliates have acted fraudulently or dishonestly, the BVI Court can appoint an inspector of the company on the without notice application of a shareholder. The Court can give an inspector wide powers including a) authorising the inspector to enter any premises and make copies of documents and records on the premises; b) requiring any person to produce documents to the inspector; c) authorising the inspector to examine any person on oath; and d) requiring any person to attend a hearing conducted by the inspector to give evidence on oath.
Trust Property Tracing Claims
In certain circumstances and insofar as it can be identified, it is possible to follow and trace trust money or other trust property into the hands of a third party, so long as that third party is not a purchaser for valuable consideration without notice of the trust. It is to be noted that the right of a party to trace or follow an asset arises by virtue of that person’s proprietary interest in the property and does not require that the transfer of the property is ‘unjust’.
Where trust property, which has been wrongfully misappropriated, is used exclusively to acquire other property for the trustee’s own benefit, the beneficiary can either assert his beneficial ownership in the proceeds or make a claim for breach of trust and ask the court to impose an equitable lien or charge on the proceeds. Both claims require the claimant to trace the trust property into its proceeds. If the beneficiary is unable to trace the trust property into its proceeds, he can still maintain a proprietary claim against the trustee.
If property has been sold, the owner can follow the property into the proceeds of sale if he can identify it or the fund it has been mixed with and obtain relief out of that fund. If proceeds are used to purchase an asset without the addition of further money, the owner can either take that property or ask the court for it to be charged for the amount of the proceeds.
An anti-suit injunction is an injunction made against a person over whom the court has jurisdiction, restraining that person from continuing with or commencing foreign proceedings. The court will only exercise its discretion to grant such relief sparingly, after exercising great caution and only if, in all the circumstances, it is equitable to do so. The circumstances in which a court will exercise its discretion to make an order are not fixed but the usual ground advanced before the BVI courts is that it is oppressive or vexatious for the respondent to continue with the claim.
In order to establish fraudulent misrepresentation, it must be shown that a) a fraudulent representation was made (including through written words, spoken words, and even silence and inaction); b) that the person that made the representation either knew that it was false, had not belief in its truth, or was reckless as to whether it was true or false; c) the person that made the representation intended the other party to rely on it; d) the other party relied on the representation; e) that the other party would not have entered into the contract but for the representation; and f) the other party has suffered loss and damage as a consequence. Fraudulent misrepresentation can include the falsification of documents, forgery, counterfeiting, identity theft and accounting fraud, with remedies of damages and recission.
Conspiracy involves an agreement between two or more legal persons to engage in a course of conduct with the intention of causing harm to another person by lawful or unlawful means. It order to establish conspiracy, it must be shown that a) two or more legal persons deliberately combined with a common intention to achieve a common end; b) the co-conspirators share the same objective of causing harm to the claimant; c) the agreement reached between the co-conspirators and the combined acts are aimed or directed at the person that has suffered loss; d) damage or loss has been suffered as a result of the conspiracy. The remedies are typically damages or recission.
Unlike jurisdictions like England and Wales, the BVI does not have pre-action protocols.
The BVI has the jurisdiction to make interim orders authorising a person to enter any land or buildings in the possession of a party to the proceedings for the purposes of detention, custody and preservation of relevant property.
Claims Against Unknown Parties
This is a developing jurisdiction for the BVI courts, but it is possible to bring claims against unknown parties where the alleged wrongdoer can be described with sufficient specificity to be identified and served, by providing email or wallet addresses, profiles and usernames etc.
The BVI Court has the power to compel witnesses to give evidence by issuing a witness summons, requiring the witness to attend court to give evidence and/or produce documents.
Where a company has a cause of action against its directors for breach of fiduciary duty, but the board refuses to initiate proceedings against those directors for the recovery of the associated losses, any shareholder can apply to the court for permission to bring a cause of action against the directors in the name of the company. This is known as a derivative claim.
A double derivative claim is a type of derivative claim brought by a shareholder of a parent company for actions accruing to the parent company’s subsidiaries. Court of Appeal authority has stated quite unequivocally that that “BVI law does not permit double derivative proceedings”, but following developments in the English common law, it is arguable that such actions may still be possible.
This allows an applicant to obtain information about a defendant’s bank account.
Criminal Discovery Orders
The BVI has a full complement of legislation dealing with money laundering and the proceeds of criminal conduct. Although this legislation includes provisions for discovery and investigation, it is not available to non-government litigants in private litigation.
Directors of BVI companies owe various duties to their companies and not directly to their shareholders. These duties are largely uncodified and include: a) the duty to act bona fide in the best interests of the company; b) a duty to act for a proper purpose; c) a duty to avoid conflicts of interest; d) a duty to disclose personal interests; e) a duty not to make a secret profit from their office; and f) a duty to act with skill and care. Where they breach these duties and cause loss to their companies they are personally liable for those losses. It is worth noting a “director” for the purposes of BVI law is defined as “a person occupying or acting in the position of a director by whatever name called”, and that no distinction is drawn between executive and non-executive directors. Where a BVI company is insolvent or in the “zone of insolvency”, directors owe their duties to the company’s creditors.
Other relevant articles: