By NEIL HARTNELL 

Tribune Business Editor 

nhartnell@tribunemedia.net

FOREIGN investors have persuaded the Supreme Court to block the Bahamian tax authorities’ bid to seize and sell-off their private islands to recover an unpaid $9.2m real property tax bill.

Acting justice Darron Ellis, in a July 31, 2024, verdict found it was “arguably irrational and procedurally unfair” for the Department of Inland Revenue to auction off the four Darby Islands in the Exumas chain when another Supreme Court judge had already approved the appointment of receivers whose primary responsibility was to settle the tax debt.

As a result, he imposed an injunction that - temporarily at least - “restrains” the Department of Inland Revenue “from exercising their power of sale” under the Real Property Tax Act. The tax collecting agency had already issued a notice of its plans to sell the Darby Islands “by public auction” in ten days’ time on August 12, 2024, in a bid to recover tax arrears that have built-up over a 14-year period.

Acting Justice Ellis revealed that efforts to sell the islands, which lie around 100 nautical miles south-east of Nassau, and are located between Farmer’s Cay and Barraterre, had been disrupted after a shareholder dispute erupted between

their owners last August. As a result, the Department of Inland Revenue appeared to lose patience and, in its frustration, moved for the now-blocked auction.

And the Supreme Court has also given Darby Shores Ltd, the corporate entity that owns the four Darby Islands, permission to initiate a Judicial Review challenge to the tax authority’s bid to seize and sell-off the properties. In addition, it gave the company the go-ahead to add Shunda Strachan, the Department of Inland Revenue’s acting controller, as a defendant in her role as chief valuation officer for real property tax.

Setting out the origins of the dispute, acting justice Ellis said Darby Shores Ltd was incorporated in 1992 as a joint venture company to own and manage the islands. Its four partners were all shareholders in the entity at that time - William Cook, Richard Davis, William Saeger and Dr William Chester, all of whom are foreign investors.

The verdict said real property tax arrears started to accumulate “in or around 2010”, resulting in Darby Shores Ltd and its owners moving to sell-off “one or more of the islands” so that the sales proceeds generated could settle the debt owed to the Public Treasury.

However, in the absence of any sale, the unpaid real property taxes continued to climb until it hit $9.204m in 2023. This was split between the four islands, with Darby Shores Ltd and its investors owing some $4.656m on Big Darby Island; a further $3.441m on Little Darby; $986,279 for Guana Cay; and $120,346 on Betty Cay.

“As a result of these outstanding sums and demand notices [for payment from the Department of Inland Revenue], and given that the islands produced very little income, on July 10, 2023, the shareholders of the applicant unanimously resolved to sell all the islands,” acting justice Ellis wrote.

Mr Cook, as Darby Shores president, just one week later signed an exclusive listing agreement with Bahamian realtor, Coldwell Banker Lightbourn Realty, to market and sell the islands for a combined $44.5m. However, this price was not based on any appraisal assessment, and only the two larger islands were placed up for sale.

Then the Department of Inland Revenue, acting on behalf of the Government and treasurer, “issued a final demand” for payment of all the outstanding real property tax on August 9, 2023. But, just two days later on August 11, the shareholder dispute among Darby Shores Ltd’s owners saw the launch of separate Supreme Court litigation.

Dr Chester wanted receivers to take over the company and four islands and on August 29 2023

Justice Donna Newton appointed Lindsay Cancino and Marcia Woodside to that role with a mandate to “resolve the outstanding property taxes” via selling the Darby Islands or any other method that would “prevent [their] being subject to a forced Bahamas government sale at auction”.

The receivers subsequently signed a deal to sell the islands for a $33.316m net purchase price on September 18, 2023, and applied to senior justice Deborah Fraser for approval of the deal on November 16 last year. This was not opposed by any party but, despite giving a verbal approval for the sale, the judge’s order “was never perfected”.

“Since the making of the approval Order, appraisals have been conducted that demonstrated that the agreed selling price was very likely a significant undervalue,” acting justice Ellis noted. “The two appraisals listed the value of the islands at $67.884m and $65m, respectively.”

As a result, some of the Darby Islands shareholders sought to persuade senior justice Fraser to set aside her oral approval and have Mr Cancino and Ms Wood- side replaced as receivers by Igal Wizman, the EY Bahamas partner and accountant, and one of his Bermuda-based colleagues, “to conduct a proper sales and marketing process” and sell the Darby Islands for a price closer to “true market value”.

However, two shareholders still back the original approval order. As a result, Mr Cancino and Ms Wood- side have agreed not to close the Darby Islands’ sale until the dispute over the approval order is heard by senior justice Fraser on October 4, 2024.

However, the Department of Inland Revenue, despite being kept abreast of the legal manoeveres, decided to press ahead by issuing a June 20, 2024, notice that it will use its Real Property Tax Act ‘powers of sale’ to auction off the Darby Islands on August 12 to recover the tax debt.

This sparked the legal challenge by Darby Islands Ltd and its warring share-holders, who argued that the “extraordinary and wide-ranging power” granted to the Department of Inland Revenue to auction-off delinquent properties without first requiring court approval meant its actions can only be challenged via Judicial Review.

Kenria Smith, of the Attorney General’s Office, who was representing the Treasurer, argued that the Judicial Review bid was “irrational” and there was no arguable case. “Counsel adds that the [Government] has for years been trying to co-operate with the applicant and collect the outstanding taxes, and that the decision to sell the properties under a power of sale is rational and reasonable, and the only way.. to collect the taxes due,” acting justice Ellis said of the Government’s case.

But, while Darby Shores Ltd had been served with “final demand” for payment on October 15, 2022, along with the threat of legal action, it argued that the proposed August 12, 2024, auction “circumvents” justice Newton’s Order that the islands be sold to settle the unpaid real property tax.

The company and its attorney, Christopher Jenkins KC of Lennox Paton, said a public auction would “inevitably be on less favourable terms” than those achieved by the receivers. They also argued that the Department of Inland Revenue had not obtained its own appraisal of the islands’ value; it was listing them for sale at a “tremendous undervalue”; and there had been inadequate marketing.

As a result, Mr Jenkins and his client argued that “the sale of the islands will be at less than the actual market value to the detriment of the applicant, the respondent and the Bahamian people. A sale at a lower price will result in a shortfall of taxes that could be collected”.

Acting justice Ellis agreed with this assessment, writing: “If the properties are undervalued, their taxes are being under-assessed and a further sale at a lower price will result in a short- fall of taxes that could be collected.

“It is at least arguable that no reasonable decision-maker would make the decision having not conducted an appraisal of its own, armed with the knowledge that the properties are likely grossly under-valued and therefore under-assessed, and that a sale could result in a shortfall of taxes that could be collected.”

He added that the Department of Inland Revenue, by moving so swiftly to a public auction, was showing “apparent disregard” for the previous Orders by his fellow Supreme Court judges mandating that the receivers sell the Darby Islands to settle the unpaid real property taxes.

Suggesting that the tax authority’s plan was seeking to “circumvent” these Orders, which were designed to “prevent a sale by the manner” it was seeking, acting justice Ellis said “it would have been more prudent for the Department of Inland Revenue to hold-off.

Thus proceeding with any sale by auction was “unreasonable”, and going down this route was “arguably irrational and procedurally unfair” given that the Government had not participated in the court proceedings to-date. As a result, acting justice Ellis granted the Orders that Darby Shores Ltd and its owners were seeking.

Big Darby Island and Little Darby cover some 793 acres combined. Coldwell Banker Lightbourn Realty, in a brochure to market the property, said: “Big Darby, a 554-acre island, boasts an historic structure known affectionately by locals as ‘The Castle’, which was built by a previous owner, Sir Guy Baxter, in 1938.

“During his ownership, Big Darby island was a working plantation with goat, cotton, palm oil and fruit as its products. The ‘castle’ is in great need of repair, but will make an incredible private home or community club house for a future investor. Darby Island is home to over 14 beaches, two miles of ocean frontage and features a few stunning caves dotting its perimeter.

“Positioned in close proximity to Darby, only about 50 metres between them, the 238-acre island of Little Darby includes a 1,600 foot runway, a three-bedroom main home, three renovated cottages offering a total of seven bedrooms and multiple powder sand beaches.”