Country report: Fraud and the appointment of liquidators in the BVI

By James Hilsdon, barrister

The Insolvency Act 2003 (the Act) and the Insolvency Rules 2005 (the Rules) combined are the British Virgin Islands’ (BVI’s) all-encompassing insolvency law to deal with both companies and individuals. The Act and the Rules can also be used as a fraud-busting weapon by initiating winding-up proceedings. Creditors, as well as members, can seek the winding up of a company on just and equitable grounds.

Applicants will need to satisfy the Court as to its locus standi as creditor. The definition of ‘creditor’ ultimately depends upon what constitutes a ‘liability’ – and here the definition is generously broad. There is no requirement in the Act that the company be insolvent.

The just and equitable ground can represent a significant second string to the applicant’s bow in securing ex parte interim relief.

The route of seeking Court-appointed liquidators and provisional liquidators has several advantages over a writ action combined with interim injunction or receivership:

It is difficult to mount a forum non conveniens challenge in winding-up proceedings;
Proceedings under the Act are designed to be completed within six months of commencement;
Provisional liquidators typically have the powers of full liquidators, bar the power to liquidate and distribute assets. This has benefit in fraud cases of protecting assets and investigating the company’s affairs.

Just and equitable grounds in BVI fraud cases

In Re RBG Global SA, January 12, 2004, Eastern Caribbean Court of Appeal, (unreported), it was held that the respondent company and its principal were engaged in fraud, and there was a good arguable case that it was just and equitable that the company be wound up, notwithstanding that the company
was solvent.

In two of a series of cases, Safe Solutions Accounting Limited v. Cruise Developments Corporation (2005) and Safe Solutions Accounting Limited v. Belvedere Invest & Finance SA (2005), it was alleged that respondent companies were the instruments of fraud for the purpose of tax evasion in the UK. The High Court appointed liquidators to the respondent companies, both on the grounds of insolvency and that it was just and equitable to do so.

Fraud and interim relief

In Re RBG Global SA (2002), the BVI Court rejected an application to appoint provisional liquidators to a solvent company in the face of evidence that the respondent company was an instrument of a fraud, that its assets were in danger of dissipation and its records at risk of destruction. This decision was overturned on appeal, citing the English case of Re Claybridge Shipping Co SA [1997] 1 BCLC 572.

In Akai Holdings Limited v. Brinlow Investments Limited 2006 a provisional liquidation was maintained by the High Court on the inter partes hearing where it was satisfied that there was prima facie case for winding up, which conferred the necessary standing on the applicant as creditor. Although the respondent company had no assets, the Court considered that there may be books and records that would be important in tracing funds.

Investigation of fraud by liquidators

In both the Akai and Safe Solutions cases the use of provisional liquidators and liquidators was key to the applicants’ ability to investigate fraud or uncover assets.

Safe solutions

The Court’s appetite for appointment of liquidators on just and equitable grounds was put to the test recently in the fully contested case of Safe Solutions Accounting Limited and another v. French Connections Limited (2006).

The applicants were the liquidators of two English companies, from which significant assets had been allegedly divested by way of a fraud to a series of offshore companies. The allegations against this particular company were of circular transactions, for little or no consideration, for the benefit of the alleged fraudsters and of significant payments being made by the English companies to refurbish premises owned by the respondent.

It was said that the company did not trade and that it had no purpose save as the receptacle or conduit for the proceeds of fraud.

The applicant companies were seeking restitution rather than a debt due and owing.

The Court recognised that a creditor could apply on just and equitable grounds. The Court found that the refurbishment claim was a debt which could not be disputed as the applicants had received no benefit for the ₤368,252.06 paid to refurbish property.

The Court found that the transaction had taken place as alleged and there was no benefit to the applicant. The Court declined to appoint a liquidator on just and equitable grounds.

It was held that “The allegation of fraud which the applicants rely on substantially to present their application cannot be resolved by
this Court in a summary manner”. Given the evidence before the Court and the findings it made, it is impossible to be certain why the Court was of this view.

Final word

Safe Solutions Accounting Limited and another v. French Connections Limited is currently under appeal. The respondent company appeals, inter alia, the determination that it owes the cost of the refurbishment to the applicants. The applicants cross-appeal the Court’s refusal to appoint liquidators on just and equitable grounds.

The decision by no means closes the door upon just and equitable winding up in cases of fraud, but pending further guidance from the Court of Appeal, the extent to which the Court has the appetite to decide on matters of fraud and to wind up solvent companies must remain in some doubt.