BVI Corporate funds have been in the spotlight in recent times due to some high-profile failures (e.g. the Madoff feeder funds). While the Madoff-related funds collapsed due to an underlying fraud, i.e. the Ponzi scheme, funds may also get into difficulty for more mundane reasons such as mismanagement and the wider economic environment.
Investors in corporate funds will generally have non-voting shares, and so no control over the management of the fund, and the constitutional provisions of the fund typically afford very wide powers to the directors in relation to matters such as their own remuneration and exoneration from any conflicts of interest. Where shares are redeemable at the option of an investor, redemption may be subject to suspension, such as where directors believe that the net asset value of the fund cannot be determined, or there are other potentially valid commercial reasons, such as the temporary illiquidity of underlying assets. The investors may also invest in a feeder fund for another fund, which may be based in another jurisdiction. Functionaries of the fund, such as the investment manager, administrator and custodian may also be based in other jurisdictions.
Those considering investing in collective investment schemes should therefore ensure that they consider carefully the way in which the fund is structured and what options they may have for redress, if any, in the event the investment does not go as planned. Of course, where the investment is unsuccessful due to the ordinary commercial risks involved (as modern placement memoranda typically point out) there will usually be no question of redress. On the other hand, where there has been mismanagement, deviation from the offered investment strategy or worse, investors may wish to hold those responsible to account, whether those responsible are internal or external to the fund.
The vast majority of BVI investment funds are structured as Business Companies, and governed (as are other BVI companies) by the BVI Business Companies Act 2004 (the “Act”). For such funds, BVI law strikes a careful balance between allowing freedom of action for fund directors and managers, and providing protection for investors. The focus of the protection is on dealing with wrongdoing, unfairly prejudicial conduct and situations of paralysis or deadlock.
Unlike the Cayman Islands, which has no statutory unfair prejudice regime, and where investors may be forced to try to have a company wound up on just and equitable grounds, the Act has an array of provisions for members’ remedies in Part XA. First, a member may apply for an order directing the company (or a director) to comply with (or preventing it from contravening) the Act or the memorandum and articles, and the court also has power to grant interim relief in such cases.
There is also statutory provision for derivative actions, whereby a member may be authorised to bring an action on behalf of the company against a wrongdoer. The court will consider whether the action is in the best interests of the company, and also the likelihood of success and the likely costs. Again, though, a balance is struck: the court is required to take into account the views of the directors on commercial matters. The power will not be exercised unless either the company does not intend to pursue the relevant proceedings or it would not be appropriate to leave conduct of the proceedings to the directors or the determination of the shareholders as a whole. The court must also consider whether there is an alternative remedy. Sometimes, facts that might justify a derivative action will also give rise to a possible action for unfair prejudice, in which case the court may decline to allow a derivative action, as happened in Malitskiy v Oledo Petroleum BVIHCMAP2013/0006.
There is also express provision for complaints of unfair prejudice. Section 184I of the Act provides: “A member of a company who considers that the affairs of the company have been, are being or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, likely to be oppressive, unfairly discriminatory, or unfairly prejudicial to him in that capacity, may apply to the Court for an order under this section”. If satisfied that there has been unfair prejudice to a member, the court has broad powers to grant relief, including ordering the company or another person to acquire the member’s shares, regulating the conduct of the company’s affairs, directing the amendment of the company’s memorandum or articles of association, and the appointment of a receiver or liquidator. Matters which might provide the basis for such a claim include: taking excessive remuneration; diversion of business; and abuses of power or serious breaches of the articles of association. When assessing fairness or unfairness, however, the court will not review the commercial merits of what has been done, but rather focuses on whether it was done bona fide in the best interests of the company (Re Staray Capital Limited [BVIHC (Com) 138 of 2011]).
The most draconian power – and regarded as a last resort – is the winding up of the company on just and equitable grounds. This may be ordered where there is prima facie evidence of fraud (Re RBG Global SA [BVICVAP NO. 6 of 2003]). The financial crisis of 2008 caused a number of funds to face liquidity and in some cases existential crises. Those arguably in the latter category have been the subject of a number of winding up applications on the basis of “loss of substratum”: where the business the company was set up to pursue has become impossible. Examples of loss of substratum might include where the fund has lost its investment portfolio by reason of foreclosure by a bank which had a security over the portfolio, or where an investment strategy has ceased to be viable and redemption requests are such that the fund will no longer have sufficient assets to continue. The BVI courts have shown a willingness to use this power when appropriate and, in particular, if there is evidence that the affairs of the fund might not be wound down in a proper manner. However, where a fund’s articles of association contain a mechanism for an orderly wind down (for example, by returning assets to investors in specie) and the directors are proceeding in accordance with such provisions, the court is likely to allow that process to continue: Citco Global Custody v Y2K Finance [BVIHCV 2009/0020A]. Of course, where a fund is merely facing temporary liquidity difficulties, the directors will often be able to suspend redemptions, where constitutionally permissible; though where redemptions have been suspended for a very long time (several years), the court may infer that the substratum has been lost.
As the world’s leading offshore corporate domicile, the BVI has developed sophisticated company legislation which provides modern and flexible remedies to shareholders. These developments have been matched by the success of the BVI Commercial Court, which since its establishment in 2009 has been widely recognised as one of the most commercially astute and effective tribunals of all offshore jurisdictions.
Where BVI funds are structured as companies, as they typically are, investors can benefit from the happy by-product of the company law developments, which provide a range of potential remedies and enable the BVI courts to offer solutions commensurate with a variety of circumstances.
By Alistair Abbott, partner
+44 207 0143 228
