Third party costs order: Does the Court have power to permit service of application out of the jurisdiction?

BVIHC (COM) 105OF2014: Hornbeam Corporation v Halliwel Assets Inc, Panikos Symeou, Marigold Trust Company Limited (18 December 2014)

Introduction

In circumstances where a defendant obtains a costs order against a company but it is well known that an individual who, though not a party to the proceedings, is the ultimate beneficial owner of the company and is the real party interested in the outcome of the suit or was the person responsible for bringing the proceedings, the defendant may want to make that individual liable for his costs. Can you obtain an order to serve this non-party out of the jurisdiction? This was the question the BVI Court addressed in this decision.

Facts

Both the claimant and second and third defendants were shareholders in the first defendant. The claimant initiated injunction proceedings against the 2nd and 3rd defendants to prevent them from convening an extraordinary general meeting. This injunction was eventually abandoned. The claimant also initiated proceedings to appoint a provisional liquidator over the first defendant but this was dismissed. The court ordered the claimant to pay the 2nd and 3rd defendants' costs of the injunction application and the provisional liquidator appointment application.

Both the claimant and the 2nd and 3rd defendants initiated proceedings to join an individual who was resident abroad and was the ultimate beneficial owner of the claimant to be joined to the respective proceedings and to be made liable for the costs awarded against the claimant. The 2nd and 3rd defendants applied for an order seeking service out of the jurisdiction on the individual.

Outcome

The Court considered whether it had jurisdiction to allow service out of the jurisdiction on an individual who is not a party to the proceedings. The Court noted that the courts of England and Wales often exercise the jurisdiction to make non-parties liable for costs but noted that in the BVI, the Court does not have inherent power to grant permission to serve out. The claim must either fall within one of the gateways outlined in the Eastern Caribbean Civil Procedure Rules (CPR) or the power must be conferred by statute. The court noted that the only rule in the CPR which comes close to permitting service out on the basis of a statutory provision is rule 7.3(10) which permits service out of a claim which is made under an enactment that confers jurisdiction on the Court.

The Court clarified that Rule 7.3(10) covers cases where a statute gives the Court the jurisdiction to allow service out which it would not otherwise have but for the provisions of the statute. The Court noted that it did not have power to make a 3rd party costs order as there was no enactment conferring this power and there was no gateway available under the CPR rule 7. The Court reasoned that applications for third party costs orders are not claims as defined in Rule 7.3. The Court suggested but refrained from definitively ruling on the point, that where it is appropriate for the court to make a third party costs order, it need not serve out on the individual but if he is the real party, he may be regarded as having assented to the Court's jurisdiction by his conduct. All that would need to be done by the applicant in order to comply with rule 64.10 of the CPR (which deals with costs against a person who is not a party) is to notify his BVI legal representative of the proceedings and write to him personally at his foreign address advising him of the application and the date when it will be dealt with.

The Court concluded that it has no power to permit service out of the jurisdiction on a non-party.

Privy Council rejects expansive nature of rectification claims

Nilon Ltd and another v Royal Westminster Investments SA and others [2015] UKPC2

The Privy Council has recently handed down an important decision relating to the scope of the cause of action under section 43 of the Business Companies Act 2004 (the BCA) to rectify a company's register of members.

Facts

The claimants and a Mr Varma had entered into an oral joint venture agreement in England pursuant to which a business was to be established, operating in Nigeria, but incorporated in the BVI and administered from Jersey. The claimants asserted that under the agreement they were entitled, after making a capital contribution, to shares in Nilon and to dividends, and that Mr Varma was obliged to procure the allotment of shares to them. The claimants asserted that despite making the agreed payment in respect of capital, and despite having received payments from Nilon which they considered to be dividends, no shares were allotted to them by Mr Varma, and brought proceedings in the BVI against both Nilon and Mr Varma for declarations as to their entitlement to shares and for the rectification of the register of members.  Mr Varma denied the claimants' entitlement to shares on the basis that the payment made by the claimants to Nilon did not represent a capital contribution and that the payments made to the claimants by Nilon were not dividends. As such, there was a dispute between the parties as to the claimant's rights under the joint venture agreement.

Decisions

At first instance (in December 2010), Bannister J refused the claimants leave to serve their claim on Mr Varma out of the jurisdiction and struck out the claim against Nilon, on the basis that the claimants were not shareholders in the company and that the company had not agreed to allot shares to them. As such there was no serious issue to be tried as between the claimants and the company, and it followed that Mr Varma could not be joined under the "necessary and proper party" test. The key finding at first instance was that the claimants had no existing right to be entered in the company's register of members. If their interpretation of the joint venture agreement was correct, they may have a personal claim against Mr Varma to allot shares to them, but would still not have a valid claim against the company for rectification under section 43 BCA because, crucially, they would still have lacked legal title to the shares.

The Eastern Caribbean Court of Appeal overturned this decision, adopting an expansive view of the rectification jurisdiction and finding that the provisions were broad enough to encompass the resolution of underlying disputes between parties as to their entitlement to legal and beneficial title to shares. On this view, the claim should not be struck out and the fact that the dispute related to the ownership and administration of a BVI company was enough to give the BVI court jurisdiction over such a claim.

The Privy Council has decisively overturned the Court of Appeal and, effectively, endorsed the approach advocated by Bannister J to rectification claims some four years previously. In a strident ruling, Lord Collins stated that "proceedings for rectification 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 dependent on the conversion of an equitable right to a legal title by an order for specific performance of a contract."

Lord Collins went on to rule that the BVI was not an appropriate forum for the determination of what was effectively a contractual dispute between the parties under the terms of their joint venture agreement, striking a further blow to the principle that disputes relating to the constitution, administration and ownership of a BVI company should be determined in the BVI courts. Although the claim had been issued before the amendment to CPR 7.3, which added a jurisdictional gateway for the service out of such claims, Lord Collins stated that "the fact that there is a specific gateway dealing with the ownership or control of a particular type of property within the jurisdiction does not obviate the need for a claimant to show that the BVI is clearly the appropriate forum."

Implications

The key message emerging from this decision is that rectification claims are confined to situations where the claimant has an existing right to registration as a legal owner of a company, and cannot be used as a device to bring more complex disputes relating to the entitlement to beneficial ownership and control of a BVI company in the BVI courts. Whilst the decision does not affect the well-established principle that the courts of the place of incorporation will usually be the appropriate forum for disputes relating to the constitution, administration and control of BVI companies, Lord Collins has rightly reminded us that a claim will not necessarily fall into that category simply because a BVI company is involved.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.