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BERMUDA BRITISH VIRGIN ISLANDS CAYMAN ISLANDS DUBAI HONG KONG LONDON MAURITIUS SINGAPORE / conyersdill.com

February 2015

Privy Council Guidance on Rectification of BVI Share Registers and

Service Out

Decision offers clarity, but at what price?

In a recent opinion, the Privy Council has given definitive guidance on the operation of the statutory scheme in

the British Virgin Islands (“BVI”) for the rectification of share registers, particularly in the context of applications

to serve parties out of the jurisdiction. Although this guidance is welcomed, not least since it has been an

unclear area for several years in the BVI and is of important practical effect, the result of the Privy Council’s

analysis may well be unwelcomed in many quarters.

Nilon Limited

Nilon Limited and another -v- Royal Westminster Investments S.A and others [2015] UKPC Privy Council

Appeal No 0043 of 2012 (decided on 21 January 2015) was an appeal from the BVI Court of Appeal and

concerned a claim brought for breach of a contract to procure the issue of shares in the first Defendant, Nilon

Limited (“Nilon”) and rectification of Nilon’s share register under Section 43 of the BVI Business Companies Act

(“the Act”). Nilon was a BVI incorporated company.

The second Defendant, (“MV”), was the sole registered shareholder in Nilon. The Claimants alleged that: (i) he

had orally agreed to enter into a joint venture involving the importation and sale of rice in Nigeria; (ii) they had

funded Nilon and (iii) they had received dividend payments pursuant to the arrangement between the parties.

As a result, they claimed to be the legal and/or beneficial owners in Nilon. MV denied that the Claimants were

legally or beneficially entitled to shares in Nilon or indeed that it was intended that they would be. While he

accepted that there had been a joint venture agreement, he claimed that the monies paid by the Claimants to

Nilon were loans and not paid in exchange for a shareholding interest in Nilon. MV also denied that the sums

paid by Nilon to the Claimants were dividends.

First Instance Decision

Since MV was resident in London the Claimants applied for permission to serve the Claim out of the jurisdiction

on him relying on Rule 7.3(2) (a) of the Eastern Caribbean Supreme Court, Civil Procedure Rules, 2000. This

is a “necessary or proper gateway”, and requires that there be a real issue which is reasonable for the court to

try as between the Claimant and the “anchor” or domestic Defendant and that the foreign Defendant be a

necessary and/or proper person to the Claim. There was no serious suggestion that, on its own, the breach of

contract Claim had any connection with the BVI or that any other gateway would be available to the Claimants.

It was therefore imperative that the rectification Claim against Nilon should survive scrutiny if the Claimants

were to have any chance of serving the Claim on MV.


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February 2015

At first instance, it did not.

The relevant terms of Section 43 of the Act provides as follows:

“43. (1) If

(a) information that is required to be entered in the register of members under Section 41 is

omitted from the register or inaccurately entered in the register, or

(b) there is unreasonable delay in entering the information in the register,

a member of the company, or any person who is aggrieved by the omission, inaccuracy or delay, may

apply to the Court for an order that the register be rectified, and the Court may either refuse the

application, with or without costs to be paid by the applicant, or order the rectification of the register,

and may direct the company to pay all costs of the application and any damages the applicant may

have sustained.

(2) The Court may, in any proceedings under subsection (1), determine any question relating to the

right of a person who is a party to the proceedings to have his name entered in or omitted from the

register of members, whether the question arises between

(a) two or more members or alleged members, or

(b) between members or alleged members and the company,

and generally the Court may, in the proceedings, determine any question that may be necessary or

expedient to be determined for the rectification of the register of members”.

The BVI Commercial Court (per Bannister J) refused permission to serve the Claim out of the jurisdiction on

MV and struck out the Claim against Nilon on the basis that there was no evidence that the information

required under Section 41 had been omitted from Nilon’s register of members and, even if the Claims against

MV were successful, it would only result in an, in personam, order against MV to procure the issuance of the

new shares to the Claimant and would not give the Claimants an interest (whether equitable or legal) to the

shares themselves. The Commercial Court concluded that Section 43 could not be used to determine whether

a Defendant was in breach of a contract to procure that a company would issue shares.

Court of Appeal

The Court of Appeal allowed the Claimants’ appeal. In coming to a different conclusion, the Court accepted

that ordinarily Section 43(1) would be used to summarily settle plain issues of omissions, delays or

inaccuracies in the register of members but that since Section 43(2) expressly gave the Court the discretion to

“determine any question relating to the right of a party to the proceedings” to have his name entered on the

register, the Court was compelled to have regard to both equitable and legal rights. The Court of Appeal

determined that while the Court could not order rectification where the Claimants were not in a position to

assert legal title, it could decide the dispute as to their entitlement, presumably as a preliminary issue, prior to a

trial on rectification. In coming to this decision the Court of Appeal relied heavily on the English Court of Appeal

decision in Re Hoicrest Ltd [2001] 1 WLR.

In Hoicrest, the Applicant sought rectification of Hoicrest’s register of members on the grounds that the shares

issued in Hoicrest were being held by the Respondent on trust for him pending the repayment of a loan by her

to fund the acquisition of a lease by the Company. The Court of Appeal held that the rectification provisions

enabled the Court to direct a trial of the Applicant’s Claim to a beneficial interest in the shares held by the


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February 2015

Respondents. This was a case with analogous facts to Nilon: the Claimants’ assertion that its entitlement to the

shares was a matter that could be determined within the remit of the Court’s rectification jurisdiction. Nilon

appealed to the Privy Council.

Privy Council

While the principles on service out were examined in some detail (and the exceptional nature of that

mechanism was emphasised), it was the scope of the discretion under Section 43(2) of the Act which was the

most significant aspect of the Privy Council’s judgment. The main issue was whether that discretion conferred

on the Court, in the present case, the power to determine the right of the Claimants to have their name

registered as members. The Privy Council said it did not.

The Court conducted a compendious review of reported decisions on the rectification of the share register

going back to the Joint Stock Companies Act, 1856 and the Joint Stock Companies Act, 1875. In so doing, it

concluded that the Courts had made it clear that the summary nature of the rectification jurisdiction was

unsuitable for a substantial factual dispute and that Hoiscrest stood on its own in deciding that it was sufficient

for an application to engage the rectification jurisdiction to have a prospective (as opposed to immediate) right

against the Company. The Privy Council opined that the overwhelming majority of cases turned on legal title

and expressed “no doubt that the legislation was concerned with legal title.”

The Privy Council was of the view that in reality Hoicrest was (merely) a case management decision and stood

alone in representing a decision where rectification was considered a permissible avenue by which to resolve a

dispute concerning beneficial ownership. It was perhaps inevitable following those observations that the Board

concluded that Hoicrest was wrongly decided as a matter of principle and found that rectification proceedings

would only be appropriate where an applicant had an existing right to registration by virtue of a valid transfer of

legal title and in contrast would not be appropriate where the Claim against the Company was prospective

based on the conversion of an equitable right to legal title by virtue of an Order for specific performance.

Commentary

The ability to use the rectification mechanism in the manner endorsed by the Court of Appeal offered an

obvious and real juridical advantage to an Applicant who, inter alia, would otherwise have had an uncertain

connection with the BVI. It also presented the Applicant with a summary process by which title to shares would

be determined.

The Nilon decision is consistent with the great majority of cases on rectification. It is the only decision in the

Eastern Caribbean on this issue and would no doubt be relied on by other territories and states with similar

provisions in the years to come.

The effect of this decision may well however be to make rectification and related Claim less easy to pursue for

a number of reasons. First, it seems clear that a two stage process is now certainly required. An entitlement to

the shares in question must first be determined. This may, or may not, be by way of proceedings for which the

BVI is the natural forum. If the BVI is not the natural forum, consideration will need to be given in the foreign

proceedings as to whether the BVI company should be joined to those proceedings. Following the first stage

determination, it would then be necessary to commence the rectification stage of the proceedings, against the

BVI company, most naturally, in the BVI. Query, however, whether it would be necessary to join the parties

against whom the adjudication at the first stage was obtained. This will depend upon the precise form of relief

sought and obtained in those proceedings. If it is necessary that they be joined at this stage, it will then be

necessary to seek service out.


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February 2015

Conclusion

It can be seen that the effect of Nilon is likely to create a far less “straight-line” route to achieving rectification in

many cases. While undoubtedly this is legally correct, on a practical level, it may be far from welcome.

Authors

Richard Evans

Partner

+1 284 852 1115

[email protected]

Tameka Davis

Associate

+1 284 852 1120

[email protected]

This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a

brief overview and give general information.

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