British Virgin Islands: BVI Court holds that judgment creditors must wait six months before seeking an order for the sale of charged property
11 April 2022
Forbes Hare
The saga involving the British Virgin Islands High Court’s jurisdiction to enforce its judgments by making charging orders against company shares or other personal property has taken another turn. In a recent judgment, JTrust Asia Pte Ltd v Konoshita,[1] the Court relied on 184-year-old legislation from the early Victorian era to hold that such orders cannot be enforced by ordering the sale of the charged property, except in separate proceedings commenced by the judgment creditor six months after the charging order was made. This will have implications for the time and the expense that successful claimants will incur in their efforts to obtain satisfaction of their BVI judgments.
Background
The genesis of the saga can be traced back to a 2008 decision of the Privy Council, in an appeal brought from the Jamaican Court of Appeal.[2] In that case, the Board noted that there had been no statutory power for the Jamaican courts to grant charging orders until the recent enactment of legislation enabling this. Absent any legislative foundation, rules of court that purported to regulate the making of charging orders were not themselves capable of conferring the necessary jurisdiction to do so.
Ten years later, a similar argument was advanced in a BVI case. In England today, the jurisdiction of the High Court to make charging orders derives from the Charging Orders Act 1979. However, the jurisdiction that was vested in the BVI High Court, upon its establishment in 1969, was the jurisdiction that had been vested in the English High Court on 1 January 1940, long before the 1979 Act had commenced. The BVI’s constitutional arrangements did not allow for the importation of English substantive law post-dating 1 January 1940, and no other source of jurisdiction for the BVI High Court to grant charging orders was identified. Therefore, the Court held that it had no such jurisdiction.[3]
This state of affairs was short-lived. Jurisdiction to make charging orders had in fact been conferred on the English High Court long before 1940. The Charging Orders Act 1979 simply put that Court’s existing jurisdiction on a more modern statutory footing. Just seven weeks after having held that the BVI High Court had no equivalent jurisdiction, the same Judge was taken in another case through the relevant history. He held that his earlier decision had been wrongly decided and proceeded to grant the final charging order sought by the judgment creditor.[4]
Another seven weeks later, the Court of Appeal for the Eastern Caribbean allowed an appeal from the Judge’s earlier decision on the same basis.[5] Since early 2019 then, it has been settled that the source of the BVI High Court’s jurisdiction to make charging orders is section 14 of the Judgments Act 1838 (1 & 2 Vict. c. 110), as extended by section 1 of the Judgments Act 1840 (3 & 4 Vict. c. 82) and given effect in the BVI by sections 6 and 7 of what is now named the Eastern Caribbean Supreme Court (Virgin Islands) Act (CAP. 80).
An abortive legislative response
These decisions, along with other considerations, prompted the BVI legislature to review the High Court’s charging order jurisdiction and to put that jurisdiction on a modern statutory footing, as had been done in England 40 years earlier. In March 2020, the Charging Orders Act, 2020 was enacted and published in the Official Gazette. However, section 1(2) of the Act provided that it would only come into force on a date appointed by the Governor by proclamation published in the Gazette. Before any such date could be proclaimed, the BVI Government shelved the Act.
The problem lay in the scope of the ownership interests that the Act would allow the High Court to charge with respect to property situated within the Territory. For instance, sections 2 and 4 would allow charging orders to be made over property that may not belong to the debtor at all, including “where a debtor has the power, directly or indirectly, to dispose of or deal with property as if it were his or her own”. This wording was taken from the standard form of interim freezing injunction annexed to Practice Direction 25A under the English Civil Procedure Rules.
Interests of this type cannot, without more, be the subject of a charging order under the current jurisdiction, whether in the BVI or in England. Charging orders may be made “over the interest of the judgment debtor in any stock or share, whether the interest be legal or beneficial, in possession or in reversion, and whether vested or contingent”.[6] However, “beneficial” in this context means “equitable”, such as the equitable interest held by a beneficiary in the property of a fixed trust. It is not to be equated with “ultimate beneficial ownership”, which is a concept with important implications under anti-money laundering legislation, but which does not necessarily connote the holding of any proprietary interest capable of being charged.
It is one thing to grant an interim freezing injunction directed to a defendant personally, covering property that the defendant appears to have power to dispose or deal with as if it were his or her own. The defendant may be presumed to own such property indirectly, through other intermediary property interests that can themselves be the subject of enforcement process, pending further investigation at the enforcement stage. Moreover, if in fact the defendant has no cognisable interest in the property, then a freezing injunction that operates only against the defendant personally may have no effect on the entitlement of a third party owner to exercise its rights with respect to the property independently of the defendant. A charging order, however, is an enforcement measure that takes effect as an equitable charge on the property, thereby giving the judgment creditor a proprietary interest in it. That is an onerous thing to impose where title to the property lies with a non-party to the proceedings who may be given no advance notice of the encumbrance and no opportunity to challenge it until after it has been created.
Perhaps even more fundamentally, the Charging Orders Act, 2020 would allow charging orders to be made “where a debtor owns share in any company or other legal entity which in turn directly or indirectly owns share in a company incorporated within the Territory”. If a judgment debtor owns the shares in Company A, and if Company A owns the shares in Company B, then a charging order over the shares in Company B would give the judgment creditor a proprietary interest in those shares. Not only would that proprietary interest be something more than what the judgment debtor holds with respect to the Company B shares in the first place, but it would also leapfrog over the interests of a charge holder over the judgment debtor’s shares in Company A and over the interests of an unsecured creditor of Company A. It would, in effect, disregard the separate corporate personalities of Companies A and B.
Evidently, the BVI legislature was alive to the risk that unscrupulous debtors may load up their companies with debts owed to friendly parties as a means of avoiding enforcement by creditors against their equity interests in such companies. However, the charging order jurisdiction needs to operate in an environment in which BVI vehicles are used for debt financing transactions as well as for asset protection structures. Maintaining the sanctity of the separate corporate personality doctrine is a key part of the BVI’s offering as an international financial centre, and lenders who fear seeing their debt and security interests overtaken in this way may decide instead to look elsewhere.
For these reasons, the legislation was sent back to the drawing board, where for the past two years it has remained. The BVI High Court’s recent judgment in JTrust Asia Pte Ltd v Konoshita may, however, provide some impetus to revisit it.
The six-month and separate proceedings provisos
In that judgment, the Court considered the effect of the concluding words to section 14 of the Judgments Act 1838, “provided that no Proceedings shall be taken to have the Benefit of such Charge until after the Expiration of Six Calendar Months from the Date of such Order”. The effect of these words had not been considered in the earlier BVI decisions addressing the source of the Court’s charging order jurisdiction. Mid-nineteenth century English decisions explained that, after a charging order had been granted, the judgment creditor had to wait six months before applying for an order for the sale of the charged property, the net proceeds from which would be applied towards the satisfaction of the judgment debt.[7] This would allow time for third parties to assert and to prove the priority of any competing equitable interests in the charged property. This was referred to in the Court’s judgment as the “six-month proviso”.
A second consequence of this wording, referred to in the judgment as the “separate proceedings proviso” was that an order for the sale of the charged property could only be granted upon the judgment creditor commencing separate court proceedings. This was initially a by-product of having separate courts of law and of equity when the Judgments Act was enacted. A common law court could grant a charging order, but obtaining an order for the sale of the charged property required the judgment creditor to file suit in chancery. The courts of law and equity were consolidated into the Supreme Court of Judicature, comprising the High Court of Justice and the Court of Appeal, by the Supreme Court of Judicature Act 1873 (36 & 37 Vict. c. 66) and the Supreme Court of Judicature Act 1875 (38 & 39 Vict. c. 77). However, a late-nineteenth century English decision held that the separate proceedings proviso remained in force, notwithstanding the consolidation.[8]
The judgment creditor in JTrust Asia Pte Ltd v Konoshita argued that the six-month proviso and the separate proceedings proviso were validly overridden, or impliedly repealed, by later rules of court that purported to allow an order for sale to be sought at the same time and in the same proceedings as an application for a charging order. This argument was premised on sections 99(1) and (4) of the Supreme Court of Judicature (Consolidation) Act 1925 (15 & 16 Geo. 5 c. 49), which empowered a body of specified persons to makes rules of court (relevantly) repealing the Judgments Acts of 1838 and 1840. It was argued that this rule-making power was conferred on the BVI High Court pursuant to the same legislative provisions that vested in that Court its jurisdiction to grant charging orders, and that the power was then exercised by the making of Part 48 of the Eastern Caribbean Supreme Court Civil Procedure Rules.
There were, however, two difficulties with this argument. First, the rule-making power conferred by the 1925 Act was not a jurisdiction that was vested in the English High Court. Rather, it was a power conferred on the body of persons specified in that Act. Accordingly, this power fell outside the scope of the legislative provisions that later vested the English High Court’s jurisdiction (as at 1 January 1940) in the BVI High Court. Second, the ECSC Civil Procedure Rules are not made by the BVI High Court. Instead, they are made by a separate body of judges under section 17 of what is now named the Eastern Caribbean Supreme Court Order (SI 1967/223) and they are given effect in each Member State and Territory of the Eastern Caribbean Supreme Court by domestic legislation. In the BVI’s case, this result is achieved by section 85(1) of the Eastern Caribbean Supreme Court (Virgin Islands) Act (CAP. 80).
The question for the Court, therefore, was whether the six-month proviso and the separate proceedings proviso continued to regulate the charging order in England as at 1 January 1940. The Court held that it did. A 1939 decision of the English High Court confirmed that section 14 of the Judgments Act 1838 remained in force at that time and, in its discussion of earlier decisions, did not suggest that the separate proceedings proviso had ceased to have effect.[9] Another English decision held that, as late as 1961, the six-month proviso remained in effect.[10]
Those findings were determinative of the matter. The judgment creditor had applied for an order for sale in the same proceedings as and less than six months after the making of the charging order. By the time that the order for sale application came on for hearing, the judgment debt had in any event been paid. However, even if the judgment debt had remained unpaid, the Judge held that he would have been compelled to dismiss the application. The judgment debtor was therefore regarded as the successful party and was awarded his costs.
Conclusion
Hopefully, the JTrust Asia Pte Ltd v Konoshita judgment will prompt the BVI Government to revisit the Charging Orders Act, 2020 and to consider whether an amended version of it might be introduced without jeopardising the legal regime governing bodies corporate and property interests which underpins the Territory’s status as an international financial centre.
A copy of the judgment is at https://www.eccourts.org/jtrust-asia-pte-ltd-v-mitsuji-konoshita/. Forbes Hare acted for the judgment debtor.
[1] BVIHCM 2020/0167; 1 November 2021.
[2] Levy v Ken Sales & Marketing Ltd [2008] UKPC 6.
[3] Stichting Nems v Gitlin (BVIHC (COM) 0001 OF 2018; 19 December 2018).
[4] Commercial Bank of Dubai v Al-Sari (BVIH(COM) 114 of 2017; 6 February 2019).
[5] Stichting Adminsitratiekantoor Nems v Radchenko (BVIHCMAP2019/0003; 29 March 2019).
[6] VTB Bank v Miccros Group Ltd (BVIHC (COM) 2018/0067; 23 January 2020) at [19].
[7] Watts v Jefferyes; Ex parte Reece (1851) 16 L. T. 501; 3 M. & Gord. 372; Cragg v Taylor (1866) LR 1 Ex 148.
[8] Leggott v Western (1884) 12 QBD 287.
[9] Daponte v Schubert [1939] Ch 958.
[10] Pateras v Pateras [1961] 1 WLIK 440.