BVI Offshore Business: Grey Area

Kludjeson International Limited (KIL), the company which issued a legal suit against a HK-based Hutchison Telecommunication Limited, accusing it of fraud, is currently in a legal showdown with institutions and personalities to win the ownership dispute of the mobile telecommunication company in the court.

In the ownership struggle over KIL’s subsidiary Celltel Limited, a BVI company which is now conducting business as Kasapa Communications Limited, both companies have descended on the institutions and personalities manning the affairs of the company, and accused them of fraudulent actions. The names mentioned in the joint legal suit of KIL and Kasapa Communication include the Standard Chartered Bank Limited, Pricewater House Coopers, an Accountancy and Management Consultancy firm, Bentsi-Enchil, Lesta and Ankomah, a private partnership company providing legal services and Sudan Telecommunications Limited of Sudan. Among other defendants there are Trustee Services Limited, a company issuing secretarial duties, and its General Manager Philip Dosoo, British Virgin Islands-registered offshore companies Certwell Limited, Kuwata Limited and EGH International Limited, and Expresso Group Limited of United Arab Emirates. Also, the list of defendants includes Emad H. Ahmed, Emad Sukker, both of United Arab Emirates, Ihab Ibrahim Mohammed Osman of Sudan and Lung Hien Ching, a resident of Ghana.

Among other decisions, plaintiffs are seeking a court declaration that BVI companies Certwell Limited, Kuwata Limited and EGH International Limited, as well as some other defendants, are not direct or indirect shareholders of Kasapa Telecommunication Limited, and Emad H. Ahmed, Emad Sukker, Ihab Ibrahim Mohammed Osman and Lung Hien Ching are not and never been directors or alternate directors of the mobile telecommunication. Also, KIL and Kasapa are seeking a restraining order against each of the defendants and their agents apart from Trustee Services Limited and Philip Dosoo, from holding themselves as directors, shareholders, officers and offering and receiving banking services to the telecommunication company.

The Supreme Court of Philippines in its resolution denied the P6.2-billion compromise agreement between government-owned Philippine National Construction Corporation (PNCC) and Radstock Securities, Ltd., a British Virgin Islands-registered firm with HK office address. Under the agreement, PNCC agreed to assign to the BVI company all its rights and interest over a 10-hectare prime property which has transfer value of only P3.82 billion, as well as other prime properties. Also, the agreement binds the PNCC to give up in favor of Radstock 50% of PNCC’s 6% share in the gross revenue of the Manila North Tollways Corporation, with net value of P1.2 billion, and to cede 20% of its outstanding capital stock with the assigned value of shares at P713 million to Radstock.

According to the ruling of the high court as of December 2009,  the contract violates the Section of the Constitution banning the release of public funds without a legislated appropriation. In the 90-page consolidated decision issued last year, the high court pointed out that the compromise agreement would have cost the Philippines government billions in terms of prime real estate properties.

Radstock Securities, Ltd. appealed to the high court saying that the PNCC was still a private corporation even if it was a government-owned or controlled. Radstock denied there was a violation of the constitutional ban. However, the high court threw out BVI company’s appeal, saying no arguments were raised that would warrant a reversal of its earlier decision of December 2009.

The credit obligation of PNCC was assigned on January 10, 2001 by Marubeni Corporation to Radstock, and after the due date demands for payment were made to PNCC by Marubeni and Radstock, PNCC failed and refused to pay the obligation. Then, Radstock filed suit against PNCC for the sum of money and damages.

The Financial Services Authority (UK) is going to challenge a last year ruling in favour of BVI and Panama-based companies which said the FSA overstepped its powers by carrying out a request from the Securities and Exchange Commission (US) to recover documents.

The case relates to SEC investigation into Rhino, the NY-based investment adviser, when the SEC asked the FSA to recover 20 boxes of correspondence created over almost ten years and held by the London accountant Goodman Jones, which the SEC said might be relevant to its investigation. His accountancy firm held documents on behalf of two companies - the British Virgin Islands-based Creon Management and Panama-based financing company Amro International. There was no SEC investigation concerning these Panama and BVI companies, also they were not party to any SEC action. These two companies won a legal challenge against the FSA, saying it was “acting unlawfully in agreeing to appoint inspectors … to obtain the documents”.

In the opinion of the head of banking, finance and regulatory litigation at Allen & Overy Calum Burnett, the current case would help clarify the powers of the FSA to seek information on behalf of another regulator.

There is a memorandum of understanding between the Financial Services Authority and the Securities and Exchange Commission to exchange supervisory information and a history of close co-operation.

Companies linked to the property magnates Robert and Vincent Tchenguiz have filed creditors’ claims  against the Icelandic bank Kaupthing.  The entrepreneurs lost a substantial part of their wealth when the bank suddenly collapsed in October 2008.

In summer 2008 Robert Tchenguiz, one of the UK’s major investors, whose business was controlled by British Virgin Islands- and Cayman Islands-registered family trusts, had borrowed €1.7 billion from the bank, while his brother’s loans in the bank amounted to €208.7 million. Robert  Tchenguiz also was on the board of an investment company Exista, which was one of the bank’s largest shareholders. Then, the bank’s winding-up committee sued one of companies linked to the businessman for an unpaid overdraft of £643 million, and also attempted to seize proceeds from its sale of stake in the supermarket Somerfield. Also, due to the bank’s efforts Robert Tchenguiz was forced to sell his positions in the pubs group Mitchells & Butlers and the supermarket chain J Sainsbury, and lost hundreds of millions of pounds.

Now, probably as an answer to the bank, two offshore companies linked to the brothers – British Virgin Islands-registered Euro Investments Overseas, and Investec Trust, based in Guernsey, have submitted separate claims against the bank saying they are creditors, and the bank owes them money.  The claim of Vincent Tchenguiz amounting to £1.65bn, and the claim of Robert Tchuenguiz (£650m) together make more than 5 per cent of the total submissions to the bank.

The claims of the brothers probably will be contested by the bank’s winding-up committee but their validity is not likely to be examined until after creditor’s meeting which is planned on this week. If the claims are not successful, the BVI and Guernsey companies could challenge the decision in the court, or sue the bank in a separate legal challenge.

The exact details of the claims are not known, it is suggested only that they could be based on allegations that there were serious problems at the Icelandic bank before it failed. They said that this invalidated their contracts ad caused them financial damage (consequential loss).

The Republic of Liberia is to be sued in the High Court in London by two “vulture funds” - Hamsah Investments and Wall Capital Ltd., -  both registered in the British Virgin Islands. These companies are seeking to get large profits from the debt of Liberia that dates back to the 1970s. One of the “vulture funds”, Hamsah Investments, previously won a similar case against Nicaragua, having received  US$11.6 million on a debt which was bought just for US$2.5 million.

The case of these two BVI companies against Liberia showed once again the difficulty of identifying the vulture funds through voluntary schemes: the World Bank and International Monetary Fund report on outstanding commercial creditor claims against heavily indebted poor countries did not even detect this case.

Liberia is one of the poorest countries in the world, which has also most heavily suffered from vulture funds. US$357 million have been received by such companies in their lawsuits against the country -  49% of its GDP. Earlier in 2009, Liberia engaged in a World Bank scheme to purchase back a large part of its commercial debt at discounted rates.

Vulture funds are investment companies that buy up the defaulted debts of poor countries extremely cheaply and then sue them (very often in Britain or the US) for full immediate repayment of this sums including interest and penalty charges. These funds can make enourmous profits from taking money out of the economies of very poor countries.

Some months ago, the African Development Bank launched legal support organisation to protect the poor African countries from the vulture funds. Many international organisations say there is need for legislation that would prevent such cases.

The process of liquidation and recovery of fees to investors into the BVI-registered Kingate Global Fund Limited and Kingate Euro Fund Limited, which are sued as the funds linked to Madoff Investment Securities LLC, may cause even more problems than it was expected. The dispute between the court-appointed trustee for the liquidation of Madoff’s fund Mr. Irving Picard and the liquidator of the BVI funds Zolfo Cooper may become the reason for the delay of payouts to Madoff investors, and could result in solving the dispute in BVI court.

Last week, Picard had approved payments of $534 million to victims of Madoff’s $65 billion fraud, while there is $4.44 billion in claims that he has deemed valid so far. According to the documents, Picard had claimed about $870 million from the two Kingate funds, including more than $600 million sum that was paid in commissions to the BVI funds by Madoff Investment Securities during the six years to December 2008.

Zolfo Cooper is asking Kingate shareholders to approve a deal in which they would pay the trustee 50 per cent of Kingate’s current assets. The BVI funds would also pay 50 per cent of any additional recoveries to Madoff’s company, and the investors would be allowed full claims in its liquidation. Some investors are not satisfied with this distribution and want to receive any recovered management and performance fees that were paid to Kingate. However, Zolfo Cooper claims that the only alternative to the settlement would be lengthy and costly litigation, because Picard could ask the courts in BVI (where the funds are registered) and in Bermuda (the domicile of the asset manager Kingate Management Ltd) to give him control of any funds recovered there.

Picard is also involved in lawsuits with the liquidators of several other feeder funds in the U.S. and other countries, while Zolfo Cooper has to deal with the claims from  those who subscribed to invest in the Kingate funds after December 2008. Their money (about $12 million only for one of the funds) was never invested, but still it was in the Bank of Bermuda, when Madoff collapsed. In August 2009, the Supreme Court of Bermuda ordered Kingate Global to repay $6 million and $3 million to Knightsbridge Fund Limited and Standard Chartered Bank. This ruling could become a precedent for the return of the rest of money invested after December 2008, but the decision was appealed by the liquidator.

The Norwegian telecom company Telenor and its Russian partner, the telecommunications arm of the Russian financial and industrial group Alfa, settled their longtime dispute, both sides agreeing to set aside their lawsuits and instead merge their assets into a joint venture. 
The dispute between Telenor and Altimo, which is resolved now, was centered on corporate control of the Russian mobile company VimpelCom. It is also partially controlled by minority shareholder Farimex Products, registered in the British Virgin Islands, which actually brought a lawsuit against Telenor, as a result of which the Omsk court seized the Telenor stake in VimpelCom. 
A condition for closing the current agreement is the settlement or withdrawal of all current legal proceedings between the companies. It means that, before the present deal will close, the Farimex case should be closed too. The BVI company is not party to the current agreement. It seems even that it decided to withdraw from a lawsuit even before the agreement between Telenor and Altimo was publicly announced. By words of Telenor lawyers, a lawyer for Farimex agreed in a filing in the U.S. District Court to suspend its lawsuit.
Now Telenor and Altimo agreed to merge their assets in Vimpelcom, the second largest telecoms operator in Russia, and Kyivstar, the largest mobile phone operator in Ukraine of which Telenor had a controlling stake, and to create VimpelCom Ltd., which will be incorporated in Bermuda and based in the Netherlands. After the deal closes, VimpelCom Ltd. will be listed on NY stock exchange.
This seems not to be the optimal solution for Telenor, which loses control of the Kyivstar board, but  the Norwegian company was forced into it. It resembles situation with BP, the British oil company, which, after a struggle with Russian partners including the Alfa group, was compelled to surrender control over its joint venture in Russia, TNK-BP.

Liquidators of South African company Petter Trading are involved in a legal battle with Schweppes Zimbabwe Limited concerning the rights over the assets the company bought before it was placed under reconstruction. The dispute between the two companies involves ownership of injection moulding equipment, blow moulding machine and bottling equipment.

Petter Trading was a South Africa incorporated company whose role in the project was pursuant to an agreement it concluded with Africa Resources Limited - the parent company registered in the British Virgin Islands.

In 2003, Fidelity Life Asset Management entered into an agreement with Coca-Cola Central Africa  and Schweppes Zimbabwe Limited by terms of which it would purchase SZL for a price of US$1 on top of a 100 per cent equity ownership price. This upgrade was to meet international standards. Since FLAM had no access to hard currency it approached ARL which then instructed Petter Trading to procure the equipment.

It is the contention of Petter Trading that the letter claiming that FLAM was in default was written  after the reconstruction laws had taken effect, and they were just hiding behind the letter to seize equipment. It was submitted that Coca-Cola Central Africa’s rights to recover the shares in SZL from FLAM arose not from the implementation of the reconstruction laws but rather from the breach of the agreement.

In papers filed before the court, SZL argued that Peter Trading had no legal right to bring the case as SZL had entered into the agreement with Fidelity Life Asset Management, which had the obligation to procure the equipment, according to their agreement.

British Virgin Islands company Allerca Inc., also known as Lifestyle Pets Inc., is sued by a man called Andrew Reale for breach of contract, consumer fraud and intentional misrepresentation. By words of this man, on September 11, 2007 he ordered one of hypoallergenic cats which are produced by this BVI company, and has paid extra for expedite delivery. However, after two years the cat has been not delivered yet.

In the complaint filed in Superior Court in Somerset County, Reale claims he paid $7,900 for one of the cats, including extra $1,950, and expected to receive the cat after eight months. After receiving the payment, company officials changed the date of delivery several times, and in February 2009 they informed the plaintiff that the kitten would be delivered “as soon as possible.” Up to this date, Reale has not received a hypoallergenic kitten from defendants. Reale has demanded a refund on several occasions, but the BVI company refused to pay.

Allerca is a BVI company currently located in Las Vegas; it was formerly registered in California and located in San Diego. It is focused on breeding the unique hypoallergenic cats that produce a different version of glycoprotein, which is not allergic for humans. They started with producing these cats in 2006.

Company founder Simon Brodie, who has since sold his share of the business, but remains a consultant, would not comment on this litigation, but noted that in 2007 the standard delivery time was more than two years. Now the company which is expected to be under new ownership this month is trying to reduce the delivery time down to a year or less.

It became known that BVI company’s attorneys will file a response and a counter-claim against Reale. The company is going not to deliver the cat until the legal situation is finally resolved.

Chinese beverage giant, joint venture Wahaha Group, finally settled the long-lasting legal dispute with the French food and beverage group Danone SA, which started in 2007 with Danone’s complaint that Wahaha Group was running separate businesses selling Wahaha-branded products.  Since that year, the French group has filed more than 21 lawsuits in several countries – the British Virgin Islands, France, Sweden, Italy and the U.S. – to receive control of the $2.4 billion Wahaha brand.  Its claims were rejected by all courts, including the BVI court, which, however, had  once brought several BVI firms registered under Wahaha group into receivership and froze their assets, but later on revoked the decision.

The final settlement of the dispute was achieved with “the support of both the Chinese and French governments” by Danone agreeing to sell its 51 per cent stake in the Danone-Wahaha joint venture to Chinese partners. 

Neither of companies discussed a price of the sale, which made about $438 million, according to Chinese media. This sum makes less than a fifth part of the $2.6 billion that Wahaha lawyers said Danone demanded in the beginning of arbitration to end the dispute.

By this sale agreement, upon its approval by the Chinese government, Wahaha and Danone will conclude their joint venture relationship, and all legal proceedings related to the disputes between them will come to their end.  The joint venture was established by the Chinese and French groups in 1996 to produce bottled water and other beverages under the Wahaha brand.

Frank Riboud, CEO and chairman of Danone, said that since Danone entered the Chinese market in 1987, it has been highly committed to its Chinese business, and will accelerate its growth in the country despite the end of the French-Chinese joint venture.