In JTrust Asia Pte Ltd v Konoshita,1 the British Virgin Islands High Court relied on 184-year-old legislation from the early Victorian era to hold that charging orders against judgment debtors’ company shares or other personal property 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.
We addressed the Court’s judgment in our first article here. This second article considers the judgment’s implications for the enforcement of judgment debts in the BVI. A copy of the judgment is at https://www.eccourts.org/jtrust-asia-pte-ltd-v-mitsuji-konoshita/.
Enforcing BVI judgments by orders for sale
In our first article, we noted how the jurisdiction that was vested in the BVI High Court to make charging orders, upon its establishment in 1969, was the same as the jurisdiction that had been vested in the English High Court as at 1 January 1940. That jurisdiction was derived from the Judgments Acts of 1838 and 1840, and not from the much later Charging Orders Act 1979, which governs the charging order jurisdiction in England today. Section 14 of the 1838 Act had the effect that, after a charging order had been granted, the judgment creditor had to wait six months before seeking an order for the sale of the charged property (the “six-month proviso”) and could only do so by commencing separate proceedings against the judgment debtor (the “separate proceedings proviso”).
Subsequent to the BVI High Court’s reception of the English High Court’s charging order jurisdiction (as at 1 January 1940), English law on this subject has continued to evolve in ways which have not been fully replicated in the BVI. The Rules of the Supreme Court 1962 (Revision) (SI 1962/2145) and the Rules of the Supreme Court 1965 (Revision) (SI 1965/1776) revised and reintroduced the applicable rules, removing the six-month proviso in England. The Law Commission’s Report No. 74 in 1976 on Charging Orders recommended a number of changes to the scope and exercise of the jurisdiction, many of which then made their way into the Charging Orders Act 1979.
Many of these recommendations concerned English land law, personal bankruptcy and trusts. The absence of any equivalent reforms under BVI law may be of lesser concern to BVI judgment creditors, who will typically be seeking a charging order over the shares in a BVI company registered in the name of either a body corporate or an overseas-domiciled individual. Part 48 of the Eastern Caribbean Supreme Court Civil Procedure Rules replicates most of the procedural rules relevant to this scenario which are found in Part 73 of the English Civil Procedure Rules. However, the continuing effect of the six-month proviso and the separate proceedings proviso in the BVI will continue to frustrate judgment creditors, at least to some extent, until the legislature intervenes.
Our first article also noted how the Charging Orders Act, 2020 was enacted by the BVI legislature, but was then shelved by the BVI Government due to the scope of the ownership interests that the Act would allow the High Court to charge with respect to property situated within the Territory. The legislation was sent back to the drawing board, where for the past two years it has remained.
Section 3 of the Charging Orders Act, 2020 would remove the six-month proviso, as has been done in England. The procedural rules requiring the service of an interim or a provisional charging order (set out in rule 73.7 in England and in rules 48.6-48.7 in the BVI) should ordinarily be sufficient to draw the order to the attention of anyone who may wish to assert an interest in the charged property before the order is made final. Six months may have been an appropriate length of time to wait in 1838, but there is no good reason why a judgment creditor today should spend so long being kept out of the fruits of a judgment that is due and payable immediately.
With respect to the separate proceedings proviso, section 5(2) of the Charging Orders Act, 2020 replicates section 3(4) of the Charging Orders Act 1979 and would provide that a charging order is enforceable “by the Courts in the same manner as an equitable charge created by the debtor by writing under his or her hand“. In England, rule 73.10C allows for the enforcement of a charging order by the making of an order for sale, but still requires separate proceedings to be commenced through the streamlined “Part 8 procedure”. In the BVI, rule 48.2 would, if permitted by the governing legislation, remove the separate proceedings proviso entirely. Whether this would be authorised by section 5(2) of the Charging Orders Act, 2020 may need to be explored if this legislation ever commences in this form. Late-nineteenth century English authority, following the consolidation of law and equity effected by the Judicature Acts of 1873 and 1875, would tend to suggest that the current wording of section 5(2) may not grant the Court jurisdiction to make an order for sale within the same proceedings in which the charging order was made.2
The need to commence separate proceedings to obtain an order for sale is more onerous, and therefore expensive, in the BVI than in England. Whilst the “fixed date claim” procedure in the BVI bears some similarities with the “Part 8 procedure” in England, on a strict reading of rule 8.1(5) of the ECSC Civil Procedure Rules either an amendment to those rules or the issue of a practice direction under them would be necessary before a BVI judgment creditor could avail itself of that procedure. Otherwise, the claim for an order for sale would need to be pleaded in the usual way and then either default or summary judgment sought.
Additionally, where the judgment debtor needs to be served outside the jurisdiction, fresh service of the new claim would need to be effected. Doubtless, there would be a strong case for the grant of permission to effect service by alternative means, perhaps by service on the judgment debtor’s legal practitioners from the proceedings in which the judgment was given, or even to dispense with formal service where the final charging order had previously been served in accordance with the applicable rules. Nevertheless, this would involve the time and expense of a further application, and under the fixed date claim procedure there is often limited time available to have service applications dealt with and for any necessary service to be effected.
Alternative enforcement methods
In these circumstances, judgment creditors may wish to consider alternative methods of enforcing their BVI judgments. Where the judgment debtor is a BVI company, winding up proceedings will often provide the most straightforward and efficient path to a recovery. Such proceedings are not, strictly speaking, a method of enforcement against the company’s assets. Rather, liquidation is a class remedy for the benefit of all unsecured creditors of the company.3 The judgment creditor would therefore have to share in the distribution of the judgment debtor’s realisable assets (net of liquidation expenses) pari passu with any other unsecured creditors whose claims are admitted. However, if the company’s liabilities exceed its assets, such that the company is balance sheet insolvent and its other creditors cannot be paid in full, then any enforcement method that leads to a recovery by the judgment creditor alone may constitute a preference that is susceptible to clawback proceedings in the event of the judgment debtor’s subsequent liquidation upon the petition of another creditor.
In other cases, the judgment may be executed by the appointment of an equitable receiver. The BVI High Court has jurisdiction to appoint a receiver “in all cases in which it appears to the Court or Judge to be just or convenient that the order should be made“.4 The Court has followed English authority, holding that an equitable receiver will not be appointed “unless there is some hindrance or difficulty in using the normal processes of execution, but there are no rigid rules as to the nature of the hindrance or difficulty required, which may be practical or legal, and it is necessary to take account of all the circumstances of the case“.5
It may be an uphill battle persuading a BVI Judge that the “hindrance or difficulty” required to appoint an equitable receiver is the intentional effect of an Act of the United Kingdom Parliament, which the BVI legislature has by its own enactment made applicable in the BVI and which it has declined to override. However, other circumstances will often supply the additional factors needed to justify the appointment.
For example, in recent unreported BVI High Court judgment, an overseas-domiciled individual judgment debtor owned the shares in a BVI company, which in turn owned real estate overseas. The real estate was encumbered to a bank and, after summary judgment was given, the judgment debtor vacated the property and stopped servicing the mortgage. Waiting six months before applying for an order for sale to enforce a charging order over the shares in the company would have depleted the net proceeds that the judgment creditor could have obtained from the realisation of the underlying real estate. There was also a concern that the previous mortgage repayments made by the judgment debtor on the company’s behalf may have given rise to debts owing from the company to the judgment debtor, which would have further depleted the value of his equity in the company. Accordingly, the Court appointed an equitable receiver over the judgment debtor’s shares in the company and over any debts owing from the company to the judgment debtor by way of execution of the judgment.
Section 245 of the BVI Business Companies Act, 2004 provides that the situs of the ownership of the shares in and of the debt obligations of a BVI company is in the BVI, regardless of where the company’s register of members may be located or where its debts may otherwise be enforceable. Applying BVI law as the lex fori, and noting that the BVI High Court will have accepted personal jurisdiction over the judgment debtor in giving the judgment, jurisdictional issues should not impede the appointment of an equitable receiver over such interests. Debts owing from the company to the judgment debtor are not amenable to charging orders, so levying execution against them will require either attachment or the appointment or a receiver in any case. However, the fact that BVI law ascribes a BVI situs to the shares in BVI companies may be important if an equitable receivership order needs to be enforced overseas, at least in a jurisdiction that follows English conflict of laws rules.6
One potential disadvantage of appointing a receiver is the cost involved in funding the receiver’s fees. The receiver will be entitled to indemnification for these fees from the assets over which he or she has been appointed. However, unless the value of those assets exceeds the sum of the judgment debt plus the receiver’s fees, this will reduce the net proceeds that are recoverable by the judgment creditor.
The BVI High Court is accustomed to appointing BVI licensed insolvency practitioners and their overseas colleagues jointly to receivership roles. A differently qualified appointee might conceivably be appointed in an appropriate case, since this is not an insolvency appointment requiring the holding of a licence under Part XX of the Insolvency Act, 2003. However, if the appointee does not hold the professional indemnity insurance required of licensed insolvency practitioners, then he or she may be required to provide security for the appointment. The appointee would presumably insist that this be funded by the judgment creditor.
The appointment of a receiver may, however, be required in any event, as an adjunct to an order for sale. BVI judgment debtors, or the individuals who control them, are often outside the BVI High Court’s territorial jurisdiction. Once judgment has been given against them, they may have little incentive to cooperate with enforcement against their BVI assets and may instead elect simply to abandon the property. If instead they were minded to cooperate, then they would probably have just paid their judgment debts in the first place, without the need for enforcement action.
The Registrar of the BVI High Court can in an appropriate case be authorised to sign an instrument of transfer on the judgment debtor’s behalf of his shares in a BVI company, where the judgment debtor withholds his cooperation. However, this power tends to be more effective in cases involving the forced sale of real property, rather than charged shares in BVI companies. The mechanics of transferring shares in BVI companies under the provisions of the BVI Business Companies Act, 2004 require steps to be taken by the company’s directors as well as by the transferor. The taking of these steps may not be so easily compelled where an absconding judgment debtor outside the jurisdiction controls the company’s board and holds its original register of members.
In those circumstances, a receiver may be appointed with powers to exercise the judgment debtor’s rights as a member of the company. The receiver can then elect himself or another appointee to the company’s board in place of its existing directors and, in that capacity, can (where an order for sale has been made) take the necessary steps to reconstitute the company’s register of members and to register the transfer of the shares. Moreover, whether as ancillary to an order for sale or pursuant to a receivership by way of equitable execution, the receiver (or his or her appointee) qua director can then take control of and realise the company’s underlying assets, much like a liquidator of the company would do, before taking the necessary steps to upstream the net proceeds to the judgment creditor and to complete the assignment.
Conclusion
In many cases, the appointment of a receiver will be necessary to ensure the effective enforcement of a BVI judgment, even where the method of enforcement involves an order for the sale of charged shares in a BVI company. The BVI High Court’s holding that the six-month proviso and the separate proceedings proviso continue to govern the exercise of its charging order jurisdiction will likely incentive judgment creditors to look for reasons why their judgments should be enforced by the appointment of equitable receivers, as an alternative to charging orders and orders for sale. However, there will inevitably be cases in which such reasons are difficult to find. In those cases, judgment creditors may have little option but to wait for the six-month period that the United Kingdom Parliament thought appropriate in 1838 before their charging orders can be enforced by orders for the sale of the charged property.
In an industry still largely attached to the billable hour, time is money, and delay means greater expense. Aside from legal fees, other economic costs will invariably result from such delays. Unless the recoverable value of the charged property exceeds the amount of the judgment debt, it will provide little consolation to the judgment creditor that statutory interest of 5% per annum will accrue on the unsatisfied part of the debt under section 7 of the Judgments Act (CAP. 35). Judgment creditors, and claimants contemplating commencing proceedings in the BVI High Court, will need to take these additional costs into account when budgeting for their legal expenditure and weighing the risks against the potential rewards of proceeding with recovery action.
Footnotes
1. BVIHCM 2020/0167; 1 November 2021.
2. Leggott v Western (1884) 12 QBD 287.
3. Daselina Investments Ltd v Kirkland Intertrade Corp (BVIHCM2019/0149; 17 December 2019) at [16]; citing PT Ventures SGPS SA v Vidatel Ltd (BVIHC (COM) 2015/0117; 8 February 2016) at [46].
4. Eastern Caribbean Supreme Court (Virgin Islands) Act (CAP. 80), section 24.
5. Industrial Bank Financial Leasing Co Ltd v Xing (BVIHC (COM) 0032 of 2018; 28 January 2020) at [17]; following Cruz City I Mauritius Holdings v Unitech Ltd [2015] 1 All ER (Comm) 336 at [47(c)].
6. See Dicey, Morris & Collins, Conflict of Laws (15th ed, 2012) at [22-023]-[22-025], [22-044]-[22-045].
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.