16 June 2020

Enforcement of PRC judgments in the British Virgin Islands establishes an important precedent

The British Virgin Islands (BVI) Court has for the first time recognised and enforced judgments delivered by the Court of the People’s Republic of China (PRC). It is a significant development in light of the established practice of Chinese individuals and entities using BVI corporate entities as asset holding vehicles. The decision sets a significant precedent as many practitioners and judgment creditors alike in the PRC have historically considered BVI corporate entities (and their assets) as being beyond the reach of the PRC courts and often left ‘forgotten’, notwithstanding the well-established rules for recognition and enforcement of foreign awards and judgments in the BVI.

In the matter of Industrial Bank Financial Leasing Co Ltd and Xing Libing (BVIHC (COM) 0032 of 2018), Industrial Bank Financial Leasing Co Ltd (the 'Bank') held three judgements in the PRC which it sought to utilise in the BVI (the 'PRC Judgments'). Specifically it sought recognition of the judgments there and enforcement by way of appointment of equitable receivers over the 100 per cent shareholding held by the judgement debtor in a BVI company, Firstwealth Holding Ltd ('Firstwealth'). The motivation for this enforcement was clear: Firstwealth owned valuable assets including shares of a Hong Kong listed company, deposits in bank accounts and (potentially) beneficial ownership in a luxury property situated in Hong Kong. These assets were ring-fenced awaiting execution by extant freezing orders in Hong Kong.

The PRC Judgments were recognised by the BVI Court and the Bank was granted a final charging order over the shares in Firstwealth. It is worth noting that the judgment debtor sought to challenge the PRC judgments on the basis that he was not able to defend the proceedings in the PRC. However, there was no application in the BVI to set aside the order for recognition of the PRC judgments, nor did the defendant seek to move the application for a stay of execution to a hearing. The BVI Court noted that in the absence of such an application before the court, the Bank was entitled to proceed to enforce the PRC judgments. The BVI Court also suggested that if the defendant were to apply for a stay, detailed evidence would be required as regards the prospect of his application to the PRC Court to challenge the PRC judgments succeeding.

The Court further gave guidance on how enforcement over shares in a BVI company should proceed:

  1. The ordinary method of enforcement against shares held by a judgment debtor is first by interim charging order followed by the final charging order.
  2. When a final charging order is made, if the debtor fails to pay, then either the shares are to be sold or an equitable receiver may be appointed over the shares. In the latter scenario the equitable receiver may be able use their powers as receiver to replace the director(s) of the company then use their powers to realise the assets of the company for the benefit of the creditor. However, the appointment of equitable receivers by way of execution will not be granted unless there is some ‘hindrance or difficulty’ in using the normal processes of execution.
  3. On the facts of the matter, the appointment of an equitable receiver would be considerably more advantageous than selling the shares of Firstwealth: the shares owned by Firstwealth in the Hong Kong listed company would return more value on the open market than the sale of the shares in Firstwealth (likely to be at a large discount) and the potential purchaser would be less interested in buying a claim to litigation for the luxury property in Hong Kong. The BVI Court considered that these were sufficient special circumstances which constituted ‘hindrance or difficulty’, making it expedient to appoint receivers.
  4. The appointment of a receiver was for the limited purpose of appointing a new director who would take steps to administer Firstwealth so as to maximise its value as opposed to ‘any and all rights the company may have whatsoever and howsoever found’ which would otherwise be an ‘exorbitant exercise of a foreign court’s long-arm jurisdiction’ according to the Judge. For that limited purpose, no expert evidence of Hong Kong law was required as the Judge considered it unlikely that the Hong Kong Court would refuse to recognise the appointment of a director which has the approval of the court of the place of incorporation of the company.

The case serves as a reminder that PRC judgments, fulfilling the relevant criteria are fully capable of being enforced in the BVI. The flexible tools available in the enforcement process, including the appointment of equitable receivers in this case, could assist judgment creditors in the PRC in maximising recovery of the judgment debt through the BVI, particularly where the judgment debtor is a BVI company or where the judgment debtor holds shares in a BVI company. There is now a clear precedent established which is of considerable relevance given the prevalence of BVI asset holding vehicles in the PRC.

 

 

An original version of this article was first published by the IBA, June 2020.

© Carey Olsen 2020.