Holding the firewall: Court confirms BVI law governs trusts of BVI company shares

In the recent decision NMH & ATG v PWP & NKT BVIHC (COM) 2023/0064, the BVI High Court (Commercial Division) (the Court) held that where trust property consists of shares in a BVI company, the trust’s validity is determined by BVI law, notwithstanding that another jurisdiction may have a closer connection to the parties or transaction, and may not recognise trusts at all. In reaching this conclusion, the Court applied the ‘firewall’ provisions set out in section 83A of the Trustee Act 1961 (the Act).

Issues, facts and arguments

The Claimants obtained an ICC arbitral award worth circa US$1.7bn against the First Defendant. During enforcement proceedings, the Claimants identified 436 shares in a BVI company, registered in the name of the Second Defendant. The Claimants alleged that the Second Defendant held those shares on trust for the First Defendant (the Trust).

The Second Defendant argued that even if the alleged Trust existed, it could only arise by inference and the issue of its validity would be determined on the basis of the law of Iraq as the jurisdiction with which it had the closest connection pursuant to the ordinary conflict-of-laws rules in section 80(1)(c) of the Act. The Second Defendant further argued that Iraqi law does not recognise the concept of trusts and, consequently, the alleged Trust was invalid, and the Claimants had no basis to assert their beneficial interest in the shares (the Iraqi Law Defence).

The Claimants made an application seeking an order striking out the Iraqi Law Defence or, alternatively, dismissing it by way of summary judgment. They argued that the issue of the Trust’s validity was governed by BVI law based on the so-called ‘firewall’ provisions set out in section 83A(8) of the Act. They also argued that section 83A(13) of the Act expressly prevents a BVI trust from being invalidated merely because foreign law does not recognise the concept of trusts.

The Second Defendant argued that section 83A(8) of the Act determines the law, which governs the issue of the validity of a ‘disposition’ of property, but not the validity of a trust.

Analysis and decision

Pursuant to section 80(1)(c) of the Act, if the terms of the trust do not expressly designate the governing law of the trust, and no reasonable inference may be drawn from the terms of the trust, then the law of the jurisdiction with which the trust had the closest connection at the time it was created shall be the governing law of the trust. Consideration will be given to factors such as the place of administration of the trust, the situs of the assets of the trust, the place of residence or business of the trustee, and the objects of the trust and the places where they are to be fulfilled.

By contrast, section 83A(8) of the Act provides that the validity of a ‘disposition’ of shares is determined in accordance with the law of the state of incorporation of a company.

The Court observed that as a matter of an orthodox private international law analysis, a distinction could be drawn between the issue of validity of a ‘disposition’ of property on the one hand, and the validity of a trust on the other hand. However, section 83A of the Act is a statutory modification of these ordinary principles. The creation of the alleged equitable interest in the BVI shares constituted a ‘disposition’ for the purposes of section 83A and its validity fell to be determined under BVI law.

As to the argument that Iraqi law does not recognise the concept of trusts, the Court held that foreign non-recognition cannot override the position established by the BVI statute and therefore Iraqi law was irrelevant to the question of the validity of the Trust. Accordingly, the Iraqi Law Defence was struck out.

Conclusion

NMH & ATG v PWP & NKT is a powerful reaffirmation by the BVI Court of the legislative intent to anchor trusts holding shares in a BVI company to BVI law. It provides welcome clarity that in cases where the alleged trust property consists of shares in a BVI company, BVI law will determine whether the equitable interest was validly created.