Fraud and the Appointment of a Liquidator, a BVI and Cayman Perspective

By Frank McGing
Published in Financier Worldwide (January 2012)

The British Virgin Islands (BVI) and the Cayman Islands are two of the largest international financial centres in terms of company and fund registrations. The BVI at the end of March 2011 had approximately 450,000 registered companies with the Cayman Islands’ total approximately 90,000. The Cayman Is­lands has a higher concentration of investment funds with over 9000 registered mutual funds in comparison to circa 2600 registered in the BVI. Given the high volumes of company and fund registrations within each centre, it is very likely that most corporate financiers will be familiar with corporate structures containing a company registered in either jurisdiction.

Unfortunately, a by-product of the high number of incorporated entities within each territory is that it is possible readers of this article may encounter an issue with an entity from either jurisdiction. A common occurrence often seen by insolvency practitioners and legal advisers in these territories involves at first instance a creditor (or other interested parties) discovering some form of fraudulent activity occurring within a standard ‘onshore’ entity. Further investigations or forensic analysis lead them to discover a transfer of funds or assets to an entity registered in either territory. Provisional research on the internet or by accessing either territories’ Company Register often yield little or no information and creditors generally form the view that they have reached a brick wall. In the majority of cases, creditors are uncertain of the system of law in each jurisdiction, and whether local legislation offers any protection to defrauded parties.

Both the BVI and the Cayman Islands are British Overseas Territories with appointed governors from the United Kingdom. Each territory is largely self-governing and self-sufficient with the UK retaining responsibility for security, defence and external affairs. Their respective legal systems derive from English common law and their courts frequently refer to English and other commonwealth countries’ case law. Furthermore, their civil procedure rules (the ‘CPR’) are based upon the English Court’s CPR. Within the Cayman Islands, Part V of the Companies Law (originally enacted in 1964 with the latest revision in 2010) deals with the winding up of Cayman Islands companies  and is based substantially upon the English Companies Act 1948. The Insolvency Act 2003 (the ‘2003 Act’) together with the Insolvency Rules 2005 (the ‘Rules’) are the BVI’s all-encompassing insolvency laws dealing with both companies and individuals. The 2003 Act is based on the UK Insolvency Act 1986, thereby affording creditors and members of BVI entities many of the same protections afforded to creditors and members of UK entities.  The legislation in both the BVI and the Cayman Islands can be used quite effectively as a fraud busting weapon through the initiation of winding up proceedings.

In either territory, once there is sufficient evidence to suggest that an entity was engaged in fraudulent activity a creditor or shareholder may apply to the court to have the company wound up on a just and equitable basis. The courts appear to accept that it may be just and equitable to wind up companies that are used as the instruments of fraud. It should be noted that for a winding up order to be issued by the court, there is no requirement in the Acts of either territory for the company to be insolvent. Applications such as these can be a vital weapon for the applicant and can be instrumental in securing ex parte interim relief. The courts have the option of appointing either a liquidator (termed as ‘official liquidator’ in the Cayman Islands) or a ‘provisional liquidator’ on an interim basis.  A key consideration in fraud related cases is the potency of a provisional liquidation. Provisional liquidators, pursuant to the appointment order, typically have most of the powers afforded to full liquidators, bar the power to liquidate and distribute assets. This has enormous benefit in fraud cases where assets need protection and the company’s affairs require thorough investigation. In either jurisdiction, a provisional liquidator may be appointed where the appointment for a liquidator has been filed but not determined, and the court is satisfied that there is a realistic need to secure the assets of the company from dissipation on an urgent basis. The court will limit the powers of the provisional liquidator as it sees fit.

When the court appoints a liquidator, custody and control of all assets will rest with the liquidator. The liquidator, among other things, will have to the power to compel the local registered agent or local service providers to deliver up all relevant company information and records. Likely information to be received from the registered agent includes the register of directors, register of members and possibly the identity of beneficial owners. Other relevant powers within the BVI include the right to interview former office holders before the court. This is to compel interested parties to appear before the court in the BVI and answer questions under oath regarding the company’s affairs. Within the Cayman Islands, the law is not as explicit but it is an offence for former company officers to hinder the work of the liquidator or refuse to cooperate with their investigation, which includes the delivery of company documents and property. In the majority of cases, the powers afforded to the liquidators within each jurisdiction should provide the liquidators with various avenues for investigation. In the majority of cases, although the company or fund is registered in the BVI or the Cayman Islands, its trade is performed elsewhere. It is in these instances that the liquidators are required to use alternative methods to exercise their powers across borders. Several options available to a liquidator include seeking assistance from a foreign court by way of a letter rogatory in order to interview company officers, seeking recognition of the liquidation in the foreign country (e.g., Chapter 15 in the US) or appointing a local liquidator in the foreign country to take control of the company assets or property located in the foreign jurisdiction.

It is important to note that within the BVI, the BVI Business Companies Act 2004 (the ‘BCA’) offers a level of protection to members. Any member who feels the affairs of the company are being conducted in a manner that is likely to be oppressive or discriminatory may to apply to the court for an order. The court may make one or more orders including, in the case of a company limited by shares, requiring the company or another person to acquire the shares of the applicant, requiring the company or another person to pay compensation to the applicant, regulating the future conduct of the company’s affairs, amending the memorandum or articles, appointing a receiver or liquidator, directing rectification of the corporate records or setting aside any decision or action taken by the company or its directors in breach of the BCA or the memorandum or articles of the company. This section can often be used to force settlement and avoid the cost of a court petition.

With regard to cost, liquidators in the BVI and Cayman try to be as practical as possible. Making the various applications to court can often be a costly exercise in terms of legal fees and, as a result, most practitioners try to explore ways to work with creditors. This is often achieved by having the petitioner fund the costs of putting the company into liquidation and retaining the liquidator to perform initial investigations to determine if the company has any assets. Once the liquidator is in receipt of this information, they can work with the petitioning creditor to agree a fee structure going forward which may be paid out of recovered assets or directly by the petitioner, or a combination of both.

To conclude, the BVI and the Cayman Is­lands should never be viewed as a dead end. With some investigation, and by utilising the territories’ creditor friendly legislation, these jurisdictions can act as the catalyst to trace assets and find solutions for defrauded parties.