Bridging the gap

  • Author : Raymond Davern
  • Date : August/September
ABOUT THE AUTHOR: Raymond Davern TEP is Head of Trust and Private Client, British Virgin Islands, Conyers Dill and Pearman

Since the repeal of the Supreme Court Act, Cap 76, and the coming into force of the Eastern Caribbean Supreme Court (Virgin Islands) Act, Cap 80, it has not been possible to effect legal assignments of choses in action under British Virgin Islands (BVI) law without the consent of the debtor unless either the assignment is to or by the Crown (an exception recognised at common law) or the assignment is of a type of property, such as shares or copyrights, that has its own statutory transfer regime.

Under s25(6) Cap 76, such assignments were possible if the assignment was absolute, in writing and signed by the assignor, and written notice had been given to the debtor (i.e. consent was not required). This mirrored the English position, which has continued from 1873 to the present and is now provided for by s136 of the English Law of Property Act 1925. The enactment of Cap 80 changed the BVI position, accidentally it seems, by repealing but not re-enacting s25(6) Cap 76. This article explores how this gap in the law affects assignments of choses in action into trust, examining the problem from the perspective of the constitution of trusts and of actions.

Constitution of trusts

The need for a trust be constituted is the requirement that title to trust property must be or become vested in the trustee. The need does not, however, mean legal title to the property must reach the trustee, as it is possible to settle equitable property into trust. All that need happen, therefore, is that an assignment that is effective in equity should occur. Whether an assignment is effective in equity will, subject to any formality requirements, turn on whether there has been sufficient outward expression of the intention to make an immediate disposition of the assignor’s rights (Finlan v Eyton Morris Winfield [2007] EWHC 914 (Ch)). Compliance with the repealed s25(6) Cap 76 (absolute assignment in writing) will meet this requirement, although the notice to debtor required by that provision is not necessary (though it is prudent). Nor, save where future property is assigned, is value required from the assignee. This means the unavailability in the BVI of legal assignments of choses in action will not usually affect the constitution of BVI trusts.

Constitution of actions

The difficulty comes, however, when the trustee (or the beneficiary, if so entitled) wants to exercise their merely equitable right to sue the debtor. Part of what a right being ‘merely’ equitable means is that it does not carry the right to sue at law. If, therefore, the assignee’s action against the debtor proceeds without the assignor being joined as co-claimant or co-defendant, the debtor can take the point that the action (as opposed to the trust) is not properly constituted. That technical objection points to a practical concern: the debtor can say they are at risk of being sued twice for one debt, all because of a transaction between others to which they did not consent. The common-law rule against assignments without the debtor’s consent, they can further argue, was intended to protect against this very risk, and it is that rule that is law in the BVI and ought to be applied to stay or strike out the action unless the mischief at which the rule was aimed, i.e. multiplicity of suits, is eliminated by the assignor being before the court to be bound by its judgment.

There will generally be no problem where the chose is created under foreign law. This is because sub-sections 83A(8) and (9) of the Trustee Act, Cap 303, generally refer the question of the formal and essential validity of a disposition into trust with a foreign element to the relevant foreign law. Assuming foreign law is complied with, foreign debtors will not be able to raise this technical argument.

However, for purported legal assignments under BVI law of domestic legal choses in action where there is no choice or flexibility about applying foreign law, the potentially troublesome gap remains. How is it to be circumvented? There are various options.

  • Get debtor consent
  • The gap can be bridged at the outset if the debtor is made party to the assignment and consents to it (or does so in pre-action correspondence). In that case there is compliance with, rather than circumvention of, the common-law rule, and the assignment effected will be good both at law and in equity.
  • Join the assignor
  • An assignee may join the assignor as co-claimant or co-defendant with the debtor so all parties are before the court and bound by the judgment.

In England, the court has discretion to dispense with joinder of the assignor of a legal chose if the assignment takes effect as an absolute assignment in equity and merely fails to comply with one of the statutory formalities. No such discretion could have existed before 1873, however, and it is, for legal assignments of choses in action, the common law of England up to 1873 that applies in the BVI. Accordingly, if it is not possible or desirable to join the assignor, another way must be found to dispense, where appropriate, with the need to do so. There is an available jurisdiction that allows for this and that could be used in the BVI.

Section 52 Trustee Act

There is House of Lords authority from before 1873 – so a good source of BVI law on assignments – that the assignor of a legal chose holds an interest as trustee for the assignee (Fulham v M’Carthy (1848) 1 HLC 703, 722 per Lord Campbell). This is also the position one would arrive at from principle, since, if effective in equity, an assignment diverts the equitable and legal estates into different persons and that, whether by law or express intention, creates a trust.

With that in mind, note that s52(1) of the Trustee Act provides:

‘In any of the following cases, namely…

…(b) where a trustee entitled, whether by way of mortgage or otherwise, alone or jointly with another person, to stock or to a thing in action…

… (iii) cannot be found, or being a corporation, has been dissolved, or

(iv) neglects or refuses to transfer stock or receive the dividends or income thereof, or to sue for or recover a thing in action, according to the direction of the person absolutely entitled thereto for twenty-eight days next after a request has been served on him; or…

(e) where stock or a thing in action is vested in a trustee whether by way of mortgage or otherwise and it appears to the Court to be expedient, the Court may make an order vesting the right to transfer or call for a transfer of stock, or to receive the dividends or income thereof, or to sue for or recover the thing in action, in any such person as the Court may appoint.’

This section confers wide and flexible discretion. A dissolved corporation (other than a BVI business company (BC)) is caught by sub-paragraph (b)(iii) and a reluctant co-claimant assignor would be caught by sub-paragraph (b)(iv) or the catch-all provision of paragraph (e). This means there are, by definition, no circumstances where the court would not be empowered, if practical considerations made it necessary, to vest the right to sue in someone other than the assignor – the obvious candidate being the assignee.

A note on dissolved corporations

The provision in s52(1)(b)(iii) concerning corporations must be read subject to the provisions in the Business Companies Act 2004 (BCA) concerning dissolved BCs, since sections 220 and 221 BCA provide a code for what happens to the property of a dissolved BC: it vests in the Crown unless disclaimed, within the relevant time limits, by the Minister as ‘onerous property’.

If the Minister disclaims, s221(6) BCA terminates the company’s ownership of the right to sue with retrospective effect from the date of the dissolution, and subsection (7) substitutes for it:

(a) a debt in favour of any person who suffers loss or damage by the disclaimer; or

(b) a right in that person to apply to the court for an order that the disclaimed property be vested in them.

The subsection (8) condition for making a vesting order is that it is ‘just for the disclaimed property to be… vested in the applicant’.

Where the property (the right to sue at law over the chose) is disclaimed by the Crown, either the legal right to sue ceases to exist (so the assignee’s right to sue in equity is enlarged or there is no other person who can sue) or the assignee suffers ‘loss and damage’ as a result of the disclaimer, in that they cannot prosecute their action against the debtor to judgment (for want of constitution), in which case they meet the criterion for a s221(7)(b) vesting order. Since the right of an equitable assignee of a debt to have the legal right to sue the debtor vested in them must be the paradigm case of when justice might require a vesting order under s221(7)(b), the assignee will meet the substantive criterion (justice), too. Either way, therefore, where the Minister disclaims a dissolved BC’s right to sue on a chose, any objection by the debtor that a necessary party is not before the court can be defeated easily.

Where the property is not disclaimed the legal right to sue on the chose remains vested in the Crown. This, theoretically, would make the Crown a necessary party to any action against the debtor. However, since the common-law rule allows legal assignments of choses in action by the Crown without debtor consent, the obvious thing would be to invite the Minister to execute an assignment of the right. That will perfect the assignee’s title, circumvent the time limit on disclaimer and end any objection on the part of the debtor.

Conclusion

The unavailability under BVI law of legal assignments of choses in action may have been a legislative accident in 1969 and it may, equally, be that some BVI settlors have since purported to assign debts on trust on the mistaken assumption that BVI law mirrored the English position. Both settlors and legislators, however, may be relieved of

NOTE: A fuller text of this article was delivered by the author as a talk to STEP BVI in July 2011


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