In Royal Westminster Investments S.A. and others v Nilon Limited and another, BVIHCV 2010/039, Bannister J. in the BVI High Court Commercial Division conclusively addressed the issue of whether and when it is appropriate to bring an application for the rectification of a company’s register of members under section 43 of the BVI Business Companies Act 2004 (the “BC Act”), a question whose answer has been in doubt for some time in the BVI. The case also has important ramifications for whether and when a company whose shares are the subject of a dispute, can be treated as an “anchor” defendant for service out against other parties.
The Claimants and Second Defendant incorporated a BVI company, Nilon Limited (“Nilon”), pursuant to a joint venture agreement. The Claimants contended that they had paid subscription monies for shares in Nilon but were, wrongly, not allotted. Proceedings were issued against Nilon and the Second Defendant claiming a declaration that the Claimants were owners of shares and seeking rectification of Nilon’s register of members to conform with their claimed entitlement. The Claimants served the proceedings on Nilon as First Defendant within the BVI as of right.
The Second Defendant was domiciled out of the jurisdiction and the Claimant applied for permission to serve out, using Nilon as an “anchor” defendant under CPR 7.3. Bannister J. found that there was no “real issue” to be tried between the Claimants and Nilon: they were not shareholders in Nilon and they therefore could not be entitled to the declarations sought. Permission was refused.
The Claimants amended their pleading to include claims against Nilon for breach of an alleged collateral agreement and warranty. Service out was then granted ex parte.
On the application of the Second Defendant to set aside service the Court held that there was no issue between the Claimants and Nilon to which he was a “necessary and proper party” (the test in CPR 7.3). The Court found that as a matter of fact, the assertion of a pre-incorporation contract between Nilon and the Claimants, to which Nilon was not and was never intended to be a party, was insupportable. Service out against the Second Defendant was set aside. Nilon subsequently applied to strike out the claim and/or for summary judgment.
The key issue was the scope of an application under s.43 for rectification of the register of members. Bannister J. held that s.43 took its place in the context of provisions dealing with the issue of shares and with the manner in which shareholders are registered. The right under s.43(1)(a) of a member or aggrieved person to apply to the Court to have the register rectified in case of omission or inaccuracy is exercisable “only if either (a) information which section 41 required to be entered in it has been omitted from it, or (b) any such information has been entered inaccurately.”
On the facts, there was no evidence that the name and address of any holder of a registered share in Nilon had been omitted from or inaccurately entered in the register of members.
The Court has a discretion under s.43(2) to determine disputed questions of title, and generally to determine any question that it may be necessary to decide for the purpose of rectification. However, since there was no one with the right to bring proceedings under s.43(1), Bannister J. held that the occasion for the Court to use its discretion did not arise.
Further, even if the Second Defendant had remained a party to the proceedings, the dispute between the Claimants and Second Defendant in the present case would only result in an in personam order against the Second Defendant requiring him to procure the issue of shares by Nilon. This gave rise to the conclusion that even at the close of proceedings, the Claimants would, in the view of Bannister J., be no closer to being able to assert their alleged share ownership rights, as an order against the Second Defendant would not make them holders of any of Nilon’s shares. Indeed, even if an order was obtained and the Second Defendant had refused to comply with it, the Court still could not order rectification of Nilon’s register of members, since “unless and until Nilon actually allots shares to the Claimants and then neglects to register them as the holders of such shares, it will not be the case that the name of any holder of shares in Nilon will have been omitted from its register of members”.
Although the decision is strictly correct in terms of its technical application of the CPR’s service out provisions and the BC Act, the Commercial Court’s hands being bound by the statutory provisions, it is arguably unhelpful from the point of view of a claimant who wishes to assert a shareholding in a BVI company, but where the defendant rogue is abroad.
It produces the result that even though (a) the situs of shares in a BVI company for the purposes of determination of questions of title is, by section 245 of the BC Act, the BVI and (b) questions relating to the incorporation of a company, its constitution and the ownership of shares are likely (under conflict of laws principles) to be governed by BVI law, a claimant may nevertheless have to go to the home courts of the defendant rogue, ask them to apply BVI law and then come back to the BVI to enforce any judgment obtained abroad. The problems of this approach are obvious: it is potentially time consuming and expensive, adding an extra layer of court proceedings; the foreign court may not correctly apply BVI law and/or it may be inconsistent with its own rules of public policy; and/or the defendant rogue may be domiciled or located in a jurisdiction where justice is difficult to obtain both as a matter of practice or procedure.
In some cases the claimant may be able to avoid this outcome if he has a proper claim against the company, for example by way of unfair prejudice proceedings: there, the BVI company might be used as an anchor defendant to serve out on others. Equally the memorandum and articles, as a contract between the members inter se and the company, can in some circumstances be relied upon to found a direct contractual claim against the defendant rogue. However, these kinds of arguments will require specific factual circumstances, and are not designed to address the real wrong, which is a dispute about shareholding in a BVI company. Why should a claimant be obliged to try to squeeze his claim into a different cause of action, instead of allowing the BVI courts to address it directly?
The preferable solution, it is submitted, would be a statutory amendment of Part 7.3 of the CPR to widen the rules on service out of claim forms. The granting of permission to serve out in cases where a claim involves the determination of a question relating to ownership of shares in a BVI company, would be a welcome extension of the service out provisions.