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BVI: Derivative actions: is good faith a requirement?

The BVI Court has considered its discretion to commence derivative actions pursuant to section 184C of the BVI Business Companies Act, 2004 (BCA) in the recent decision of CHC Investment Holdings Limited v Harvest Network Limited [BVI HCM 2016/0157].  The case involved CHC Investment Holdings Limited (CHC), a Hong Kong listed company, seeking permission to commence actions in Hong Kong in the name of Harvest Network Limited (Harvest Network), a BVI company, for breach of directors’ duties.

In deciding to grant leave to CHC, the BVI Court found that it was the claimant’s burden to demonstrate that it is acting in good faith, however unless there was a real dispute, it would proceed on the basis that there was good faith.  Where there is a dispute, the Court will look to the predominant purpose of bringing the action.  If there was a legitimate predominant reason, for example to vindicate a shareholder’s rights to good corporate governance, the BVI Court would generally find good faith.  An animus between shareholders was not considered to be enough to demonstrate bad faith, nor was a procedural irregularity where CHC had commenced separate derivative proceedings in Hong Kong (which had been issued but not served or otherwise pursued) without the express leave of the BVI Court.

Justice Wallbank distinguished his decision from Glory Advance International Limited v Merit Fortune Holdings Limited [BVIHCM 2015/90].  Glory Advance placed the burden on the claimant to positively consider any alternative remedies and provide evidence and submissions as to their adequacy, or lack thereof, and why those remedies are not being pursued.  In CHC, Justice Wallbank found that the “apparent procedural and evidential prescriptions” were not generally applicable requirements, but merely guidance, and that an unfair prejudice remedy may not be a suitable alternative remedy to a shareholder vindicating its right to good corporate governance.

The judgment also clarifies that the BVI Court does not have jurisdiction over whether leave should be granted to non-BVI subsidiaries of the BVI company in respect of which leave was sought.

The case is significant in that it offers much needed certainty, clarification and detail as to the factors upon which the Court will exercise its judicial discretion to grant leave to commence derivative actions.

For more information, please contact IAN MANN, PETER FERRER, JEREMY CHILD or JAYESH CHATLANI.

BVI: Derivative actions: is good faith a requirement?

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