Nilon Ltd v Royal Westminster Investments SA  UKPC 2
On 21st January 2015, the Privy Council gave judgment in Nilon Ltd v Royal Westminster Investments SA  UKPC 2. The effect of the Board’s judgment is to restrict the British Virgin Islands (“BVI”) court’s ability to exert and exercise its jurisdiction to hear disputes over the ownership of shares in BVI companies in cases against defendants who reside outside BVI.
The Board allowed the defendants’ appeals from a decision of the Court of Appeal, Eastern Caribbean Supreme Court, which had allowed an appeal from a decision of the Commercial Division of the BVI High Court (Bannister J). The Board’s judgment therefore restored Bannister J’s decision to strike out the claimants’ claim against one defendant and to refuse the claimants permission to serve the other defendant out of the jurisdiction.
At the heart of the dispute lay a claim for breach of contract. The claimants alleged that the sole director and shareholder (“Mr Varma”) of a BVI company (“Nilon Ltd”) had promised to procure the issue of shares in Nilon Ltd to them. The claimants sought declarations that they were the owners of the allegedly agreed proportions of the issued shares in Nilon Ltd, as well as orders for specific performance and/or damages against Mr Varma.
The claim in contract was, by itself, insufficient to permit the BVI court to exercise in personam jurisdiction over Mr Varma. The claimants were a Panamanian company and three individuals who were, at different times, resident in either England or India. Mr Varma was also resident in England. Nilon Ltd, despite being incorporated in BVI, was intended to operate from Jersey as the holding company for the operating companies in a joint venture, the underlying business of which was concerned with India and Nigeria. There were no circumstances capable of bringing the claim in contract within any of the gateways for service on Mr Varma out of the jurisdiction in rule 7.3 of the Eastern Caribbean Supreme Court Civil Procedure Rules, 2000 (“CPR”).
CPR rule 7.3(7) now provides that a claim form may be served out of the jurisdiction where the subject matter of the claim relates to “(a) the constitution, administration, management or conduct of the affairs; or (b) the ownership or control of a company incorporated within the jurisdiction”. However, that provision entered into force only on 1 October 2011, after the proceedings had been commenced, and so that gateway was not available to the claimants.
The claimants therefore sought to establish jurisdiction by including a claim against Nilon Ltd under s.43(1) of the BVI Business Companies Act, 2004 (the “Act”) for rectification of Nilon Ltd’s share register to record the issue of shares to them. Nilon Ltd, being a BVI company, could be served in BVI as of right as the “anchor defendant” for the purposes of the gateway in CPR rule 7.3(2)(a), thereby permitting Mr Varma to be served out of the jurisdiction if “(i) there is between [the claimants] and [Nilon Ltd] a real issue which it is reasonable for the court to try; and (ii) [the claimants] now wish to serve the claim form on another person [i.e. Mr Varma] who is outside the jurisdiction and who is a necessary and proper party to the claim”. (The language of rule 7.3(2)(a)(ii) was amended to “necessary or proper party”, in line with the equivalent English provision, with effect from 1 October 2011 but nothing turned on the difference.)
The rectification claim
The Board decided the case on the basis that the claim for rectification was bad in law and should be struck out. The Board held (at ) that proceedings under s.43(1) of the Act for rectification of a BVI company’s share register “can only be brought where the applicant has a right to registration by virtue of a valid transfer of legal title, and not merely a prospective claim against the company dependant on the conversion of an equitable right to a legal title by an order for specific performance of a contract”. The claimants had, at most, acquired an equitable right to the claimed shares under the alleged contract with Mr Varma. However, unless and until Mr Varma was ordered to procure the allotment or transfer of shares in Nilon Ltd to them, the claimants had no present legal right to have their names included in Nilon Ltd’s register of members. Accordingly, the claim for rectification was bound to fail.
In reaching that conclusion, the Board noted (at ) that the object of s.43(1) and its English equivalent is “to secure a list or register which would show who were the shareholders entitled to the profits, and liable to contribute to the debts, of the company” (citing Re London, Hamburgh Continental Exchange Bank, Ward and Henry’s Case(1867) LR 2 Ch App 431 at 440 per Lord Cairns LJ) and that “membership concerns legal title” (citing Enviroco Ltd v Farstad Supply A/S  1 WLR 921 at - per Lord Collins). As the Board further observed (at ), “the summary nature of the jurisdiction makes it an unsuitable vehicle if there is a substantial factual question in dispute”. The statutory claim for rectification under s.43(1) could therefore not be used as a vehicle through which to decide substantive disputes, especially those based on claimed equitable rights, over the ownership of shares in BVI companies. The only earlier authority to have accepted a broader power of rectification was an English case, Re Hoicrest Ltd  1 WLR 414, which was held to have been wrong in principle.
As the rectification claim was bad in law, there was no “real issue which it is reasonable for the court to try” between the claimants and Nilon Ltd for the purposes of the gateway in CPR rule 7.3(2)(a). Accordingly, the Board held that service on Mr Varma out of the jurisdiction should be set aside.
Forum non conveniens
That conclusion meant that it was not necessary to consider Mr Varma’s alternative arguments that permission to serve him out of the jurisdiction should be refused in the exercise of the court’s discretion, or that the court should decline to exercise its jurisdiction to hear the claim, on the basis that BVI was not the appropriate forum for the trial of the issues. Nevertheless, the Board indicated its views on that question in obiter.
The Board was of the view that, even if there had been a viable claim against Nilon Ltd for rectification of its share register, BVI would not have been the forum conveniens because the issues between the claimants and Mr Varma had little or nothing to do with BVI (at ). On the (rejected) hypothesis that the rectification claim was properly concerned with the claimants’ asserted beneficial interest in Nilon Ltd’s shares, the dispute concerned an alleged contract between non-BVI residents (to which Nilon Ltd was not a party) concerning a non-BVI business where the witnesses and documentary evidence were outside BVI. The fact that Nilon Ltd was a BVI company was the only connection at all between the dispute and BVI. Other arguments relied upon to establish BVI as the forum conveniens, despite having been accepted by the Court of Appeal, were held to be misconceived. Accordingly, the Board concluded (at ) that the claimants could not have shown that BVI was clearly or distinctly the appropriate forum, had that question arisen for determination.
The decision in Re Hoicrest Ltd was always something of an outlier. As the Board observed (at ), it “stands alone in being an actual decision which turned on the question whether proceedings for rectification are a permissible vehicle for determining a dispute about beneficial ownership, and whether they can be used not only by a person seeking registration of a share transfer, but also by a person claiming an order for transfer of shares”. Moreover, it was in truth a decision about case management, with only costs at stake, and the result dictated by the court’s reluctance to strike out a rectification claim, thereby forcing the claimant to commence properly constituted fresh proceedings after two years of litigation (at ). There was an obvious temptation for BVI lawyers to test the validity of the implication drawn from Re Hoicrest Ltd that substantive disputes over the ownership of shares in BVI companies could be litigated in BVI in an action under s.43(1) of the Act. However, that avenue has now been closed.
In relation to forum non conveniens, two closely related points made by the Board warrant particular attention. The first point arises from the Board’s approach to the Court of Appeal’s view that “matters concerning the organisation and administration of a company are generally treated as matters ideally suited to be determined in the location in which the company has been formed” (at ; citing Dicey, Morris and Collins, Conflict of Laws, 15th ed (2012) at [30-028]) and Bannister J’s statement in the first instance judgment that “if foreigners incorporate companies in the BVI they must expect to have to come to the BVI to litigate disputes going to the membership and administration of such companies” (at ). In the Board’s view, those observations should properly be understood as applying only to disputes over the truly “domestic” affairs of companies. Examples of these would include disputes arising between members, relating to the powers of the company’s organs, over the appointment of directors, concerning the extent of members’ liability for the company’s debts or in respect of the rights of members to bring a derivative action. Claims in contract between non-members on the one hand and the company’s members or its directors on the other, where the company is not a party to the contract, would fall outside the scope of that principle. The second point arises from Board’s observation (at ) that, even if CPR rule 7.3(7) had entered into force prior to the commencement of the proceedings and had that gateway been available to the claimants, it would not have obviated the need for them to show that BVI was the forum conveniens.
Taken together, those points would appear to indicate that the court may reach a different answer to the question of the forum conveniens, whether in the exercise of its discretion to permit service out of the jurisdiction or in considering whether the court should decline to exercise its jurisdiction, depending on which of the limbs of CPR rule 7.3(7) the claimant relies upon. Where the claimant relies upon CPR rule 7.3(7)(a) (“the constitution, administration, management or conduct of the affairs” of a BVI company), the issues raised are more likely to concern truly domestic company affairs, with respect to which the Board would appear to accept that BVI would generally be the forum conveniens. On the other hand, where the claimant relies upon CPR rule 7.3(7)(b) (“the ownership or control” of a BVI company), the issues raised are more likely to involve questions of contract law and beneficial ownership of shares similar to those raised in the present case, and so the Board’s decision would mean that the claimant will need to show by reference to other factors that BVI is the forum conveniens. Accordingly, while the introduction of CPR rule 7.3(7) has undoubtedly made it easier to litigate disputes concerning BVI companies in BVI, the Board’s conservative approach to the principles of private international law, and to the doctrine of forum non conveniens in particular, serves to restrict the BVI court’s ability to exert and exercise the jurisdiction made available by CPR rule 7.3(7) over defendants who reside outside BVI.