BVI Court Case Review

January 2001

During the past year, the BVI Court passed judgment in two cases that have the potential to effect the manner in which certain aspects of offshore commerce are conducted in the Territory. Clients, trustees and advisors to clients who have bearer share companies should review their current policy, with respect to the issue, custody and transfer of bearer shares, to ensure that they are not faced with a similar problem to that highlighted by the decision in case below. In a separate case, a minority shareholder in a BVI IBC was successful in a claim against the sole-director for breach of fiduciary duties.

THE IMPORTANCE OF CUSTODY OF BEARER SHARES

THE DELIVERY OF A BEARER SHARE CERTIFICATE FOR THE PURPOSE OF TRANSFER OF OWNERSHIP FROM ONE PERSON TO ANOTHER IS ESSENTIAL

Laura Saus de Villalba v. Adex International Limited and Juris Magister (Bahamas) Limited (sued as Trustee of Mercury Trust).

The case, which is under appeal, highlights the problems which can arise where arrangements as to the custody of bearer shares has not been sufficiently considered. Appropriate procedures for the safe custody and transfer of bearer shares are essential.

The High Court of the British Virgin Islands held that in accordance with the International Business Companies Act (Cap. 291) and the Articles of Association of the First Defendant (an IBC with an entire share capital issued in the form of bearer shares) the delivery of a bearer share certificate for the purpose of ownership from one person to another was a strict requirement.

The Plaintiff is the widow of the deceased. She argued that the bearer share certificate was delivered to her by the deceased before his death on 27th February 1999. The Plaintiff also argued that, as the holder of the bearer share certificate No. 1 she was the owner of the shares in the First Defendant.

The Second Defendant is a company incorporated in the Bahamas and is the sole Trustee of the Mercury Trust, a trust established under the laws of the British Virgin Islands. The Second Defendant contends that pursuant to oral instructions from the deceased on 8th September 1998, the sole director of the First Defendant passed a resolution dated 15th October 1998 canceling and declaring void certificate no. 1 and issuing in its place certificate no. 2 for the 50,000 shares. The Second Defendant as Trustee for the Mercury Trust is claiming ownership of the entire shareholding of the First Defendant and by extension control of its assets.

The parties agree that certificate no. 1 was never delivered to the First Defendant or its Sole Director. Because the bearer share certificate was not delivered to the Director or Registered Agent of the IBC for cancellation, the court, at first instance, held that the defence and counterclaim of the First Defendant should be struck out as disclosing no reasonable defence.

MINORITY SHAREHOLDER RIGHTS

In the case of Ming Kown Koo (on his own and on behalf of all of the shareholders of Tele-Art Inc. save the second defendant v. Tele-Art Inc. (first defendant) and Elmer Yuen (second defendant) the Plaintiff, a minority shareholder in Tele-Art Inc. (the "Company") a BVI International Business Company, successfully sued the Company’s sole director for breach of fiduciary duty.

The Plaintiff’ action was based on three main complaints:

1. the Company’s failure to exercise its options to shares in another company and the issuance of 100,000 of these shares to the director’s father;
2. that the sole-director was in breach of his fiduciary duties for causing the Company to be de-listed from the NASDAQ; and
3. that the sole-director was in breach of his fiduciary duties for causing the Company to violate the United States Export Administration Act resulting in the Company suffering damages.

Having pleaded fraud on the minority (an exception to the rule in Foss v. Harbottle that minority shareholders cannot sue directors for breach of their fiduciary duties) the Plaintiff was awarded damages and obtained a declaration that the shares issued to the father were beneficially owned by the Company and held on trust by the father for the Company.