BVI Offshore Business: Grey Area

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.

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).

Shareholders of the Australian-based exploration company Midwinter Resources have called a meeting which will take place next month and during which former company’s chairman Jonathan O’Callaghan - now the non-executive director - will be probably ousted from the board. This decision of shareholders who collectively hold more than 25 per cent of the votes became the result of a conflict between Mr O’Callaghan and other directors over company’s plans to acquire a Russian coal mine.

In October 2009, Midwinter entered a memorandum of understanding with the purpose to acquire majority interest in a large coal project in Russia. However, after having reviewed the project and the structure of the proposed transaction, the company decided not to proceed with the opportunity. Immediately upon this, Midwinter received notice from the British Virgin Islands company Skala Ltd that it intended to make a proportional takeover offer at 12 cents per share. Skala’s associated company Redmet Ltd was to be the vendor of the Russian project, and Mr. O’Callaghan had disclosed to the board that he had material interest in this company.

The directors of the Australian company have concluded that the offer of the BVI-registered Skala Ltd is highly conditional and uncertain. They also noted that Midwinter has a strong cash position which equates to a cash backing of 16.5 cents per share. The board resumed that the BVI company made an attempt to gain control of Midwinter and later to cause it to continue with the transaction and to acquire the Russian coal project.

FGX International Holdings Limited, located on the British Virgin Islands, is subject to investigation which was commenced in connection with potential breaches of fiduciary duty and other violations of state law by the Board of Directors of the company. The investigation was initiated by the current shareholders of the BVI holding, who purchased the FGXI shares before December 16, 2009, over the attempt of the Board of Directors to sell FGX International to the French subsidiary of Essilor International.

On December 16, FGX International announced that it has signed a definitive agreement to merge with a subsidiary of Essilor International, under the terms of which BVI holding’s shareholders would receive $19.75 per share in cash, for an aggregate value of approximately $565 million, including the assumption of FGX debt of $100 million. The agreement includes termination fee of approximately $18.3 million. Upon completion of the merger, FGX International would become a wholly owned subsidiary of Essilor.

According to the investigation by a law firm,  this transaction is unfair to current investors of the BVI holding, and “the offer to purchase FGX International Holdings Limited appears opportunistically timed to take advantage of the current economic downturn”. The matter is whether the Board of Directors of the company broke their fiduciary duty to FGXI shareholders by agreeing to sell it at an unfair price thereby “harming FGX International Holdings Limited and its shareholders”, and whether, pursuant to this proposed transaction, the subsidiary of Essilor International may be underpaying for the BVI company.

According to FGX, the Boards of Directors of both companies have approved the merger agreement, and principal shareholders have agreed to vote their shares in favor of the transaction.

The Florida Office of Insurance Regulation issued a cease and desist order to American Assurance Underwriters Group and its affiliates, Worldwide Expatriate Administrators LLC and Worldwide Expatriate Advisors LLC, which are selling health insurance in Florida. The State insurance regulators determined the companies marketed and sold health insurance that was underwritten by AAUG Insurance Co. Ltd. without a license.

AAUG Insurance Company Ltd. is a captive insurance company licensed by the British Virgin Islands and, by words of officials, it does not hold a certificate of authority from the Office of Insurance Regulation.

BVI company and its affiliates have 21 days to challenge the action. AAUG’s executive Roy Alvarado said that they did not receive the order and would not comment until they receive and analyze it.

In September 2009, AAUG’s president Mr. Gregory spoke at a conference about the licensing issues and other regulations associated with global health insurance products in Orlando, Florida.

The director of Firepower Operations Pty Ltd, who also took the positions of the director and executive chairman of its parent company Firepower BVI, is giving his evidence at the liquidators’ hearing of the Firepower’s case.

The Federal Court examination of the collapse of Firepower, which raised about $100 million from its shareholders, continues and includes more and more details. Mr Johnston did not specify any reasons why he agreed to increase a multi-million dollar 2007 Supreme Court settlement by $2 million and millions of shares following a dispute with the former chief executive of Firepower Trevor Nairn and his wife Rhonda. The Perth court was told that the original deed of settlement had given $1.5 million in 2007, and one million shares of Mrs. Nairn.  Mr Nairn’s company Bikpela Investments received another $2.5 million and 19 million shares.  So, by February 2009 the settlement made $3 million and 7,425,000 shares for Ms Nairn and $3 million and 18 million shares for his company.

Mr. Nairns and his wife had an interest in the Cayman Islands-based Firepower Holdings Group, from which Mr Johnston transferred intellectual property rights for Firepower products. The transfer followed the setting up of another Firepower umbrella company in the British Virgin Islands, Firepower Holdings Group Ltd. 

During the liquidators’ hearing, ex-director of the company did not reveal information about how the operations between his own company, Firepower Operations, and the BVI- and CI-based companies were coordinated. Mr. Johnston has claimed that in 2006 and 2007 he gave $11 million to Owston Nominees, the company of Warren Anderson, saying that he was under threat from Mr. Anderson. The property developer Warren Anderson was the previous director of the BVI-registered holding of Firepower Holdings Group Limited. Now he is alleged by Mr. Johnston of intimidating him.

Lawyers for the liquidator agreed to Mr. Johnston writing the names down to avoid them becoming public. Richard Douglas, the barrister for the liquidator, asked for the allegations in writing. Mr. Johston said he would not object to make the names public.

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 Australian weapons company Metal Storm Limited has already suffered several delays of financial assistance from the mysterious investment company registered in the British Virgin Islands.  It seems there is little information about Assure Fast Holdings and its chairman Robert Rivero who planned to invest a total amount of $US33 million to Metal Storm in equity and debt.

The BVI company Assure Fast planned to initially subscribe $US1.925 million for 110 million shares at a price of just over $0.02 per share, with a further 890 million shares at a similar price, and a starting parcel of 100 million options for a total amount of $US15.57 million.  Chief executive of Metal Storm Lee Finniear admitted that this deal would provide Assure the control over Brisbane-based company. Assure Fast also planned to lend $US17.5 million to Metal Storm on terms that have not been decided upon yet.

A first tranche for shares was due already in late October, but its deadline was moved several times, because of such obstacles as bank holidays, cyclones and Metal Storm not knowing where Robert Rivero was based (now it is known that in Manila). The last term was set on this Thursday. Meanwhile, investors are learning more about the mysterious deal with the BVI company. Metal Storm securities have fallen 6.45 per cent to 2.9 cents. 

Terry O’Dwyer, the chairman of Metal Storm, described Mr. Rivero as a private investor. Cris Frianeza, secretary-general of the Philippine Chamber of Commerce and Industry, told that his organization had not been able to find any information about Mr. Rivero.  Also, the executive director of the Australian-New Zealand Chamber of Commerce Philippines Claudine David is “not familiar” to him. There is no information about this Philippine businessman in English internet. All these facts caused some doubts and skepticism about the Metal Storm deal with the BVI company owned by him.  Mr. O’Dwyer declined to comment this, saying the company is comfortable that the financial aid is progressing.

Metal Storm has been pursuing due diligence and checks to ensure the money is clean. The company also informed that they have not finished necessary banking processes. Now Metal Storm’s director is assisting the negotiations over the deal in Hong Kong.

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.

Canada-based Gulfside Minerals Ltd. announced its intention to proceed with its arbitration proceedings in London against the named owner of the shares of ECM LLC, Mangreat Group Ltd., which is a British Virgin Islands company wholly owned by one of ECM partners and held through a private HK company. The BVI-registered Mangreat executed a sales agreement with Gulfside in March 2007, but failed to complete the agreement.

Now the Canadian company, along with its Mongolian legal counsel, is going to determine the next round of legal action against the vendors in Mongolia. It will review all methods available to it to assert its right for additional shares of ECM LLC, the Mongolian company which owns the exploration License to the Erdenetsogt coal project.

Some days ago, the company announced that it has won the final round in its legal suit to acquire 5 per cent of ECM LLC. Previous rounds, the first of which was commenced by the Canadian company in April 2009 to secure its 5% interest in the Erdenetsogt, ended in vendors agreeing to the company expending funds in exploration, in exchange for a share in the property, paying funds to the vendors for an interest in the property, and also agreed to the company acquiring 100% of the project. The vendors however failed to deliver on their commitments, and several times even refused to execute the agreements after all the terms were agreed upon.