I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY
In 2015, the British Virgin Islands (BVI) was ranked as the world’s most important offshore jurisdiction for the sixth year running, ahead of all other international financial centres.2 A survey of many key industry stakeholders returned the clear message that the BVI is likely to remain ahead of many other important jurisdictions, such as the Cayman Islands, Jersey and the US, for the foreseeable future, its prominence in the offshore market challenged only by the massive growth that is anticipated in the principal Asian financial hubs, Hong Kong and Singapore.3 Because of its position and market share, the BVI has been described as a ‘super-jurisdiction’.4
For the past three decades, the BVI has seen tremendous growth in its financial-services sector and in the incorporation of new companies. Indeed, it is estimated that roughly 45 per cent of all offshore companies in the world are incorporated in the BVI,5 and in 2014, it was estimated that the BVI was the domicile for five times more incorporated companies than its nearest competitor.6 In addition to its pre-eminence in company incorporations, the BVI is establishing itself as a leader in the provision of fiduciary services, asset management, trust and estate planning and fund administration, as well as having a highly regarded legal system.
According to official statistics, there are 466,081 active BVI companies as of 31 March 2016, together with 1,112 private trust companies and 780 limited partnerships.7 In addition to corporate vehicles, the BVI promotes a number of regulated financial services, including the formation and regulation of offshore investment funds. The BVI is the second-largest offshore territory for offshore investment funds, with 1,999 active funds as at 31 March 2016.8 In 2007, the Financial Times published a survey showing that the BVI was the second-largest source of foreign direct investment worldwide, after Hong Kong.9
Regulatory development is also gathering pace in the BVI as the Organisation for Economic Cooperation and Development continues to push for greater transparency and offshore financial centres come under increasing scrutiny both from international organisations and the general news media. The continued success of the BVI financial services industry is therefore dependent on safeguarding rigorous standards, remaining ahead of the curve in relation to its offshore peers, preserving its tax-neutral status, and ensuring the expertise, integrity and independence of its professional service providers.
II GENERAL INTRODUCTION TO THE RESTRUCTURING AND INSOLVENCY LEGAL FRAMEWORK
i Formal insolvency and restructuring procedures
Formal insolvency in the BVI was codified in January 2004 when the Insolvency Act 2003 (IA) came into force. The primary restructuring tools in the BVI continue to be schemes of arrangement and plans of arrangement. BVI legislation does not possess an equivalent regime to the United States Chapter 11 or the United Kingdom administration. Contrary to jurisdictions such as the Cayman Islands and Hong Kong, the use of provisional liquidations in the BVI continues to be the process of choice to deal with instances of risk of dissipation of assets and do not carry the same emphasis as a light-touch restructuring tool.
However, in this regard, we believe that following an increase in successful provisional liquidation appointments in the Cayman Islands, Hong Kong and Bermuda for the purposes of restructuring, the BVI may revisit the limitations of a provisional liquidation. Case law from other jurisdictions has evolved to provide more certainty on the powers of provisional liquidators, including the power to promote schemes of arrangement in the course of their appointment,10 or in the absence of finding a ‘white-knight’ for a prolonged period of time,11 and it may be that the BVI begins to follow this trend before too long.
At present, however, the most common ways in which a BVI company will seek to implement arrangements or reorganise or restructure its debts are the use of schemes of arrangement under the BVI Business Companies Act 2004 (BCA), plans of arrangement under the BCA, and the various liquidation procedures available under the BCA and IA.
Schemes of arrangement
The BCA’s definition of ‘arrangement’ is very wide and includes reorganisations, mergers, consolidations, separations of businesses, dispositions of assets or businesses, dispositions or exchanges of shares or securities, amendments to memoranda and articles of association, dissolutions and, importantly, any combination of these. The purpose of a scheme of arrangement is for the company to agree a compromise with its creditors or shareholders to enable it to carry on as a going concern without entering into formal insolvency proceedings. A scheme may be initiated by the company, its creditors, its shareholders, or (if one has been appointed) its liquidator. To initiate a scheme of arrangement,12 the company must be incorporated under the BCA (this includes BVI companies incorporated under the previous legislation and foreign companies validly continued as BVI companies). Dissolved companies and companies that have migrated away from the BVI cannot enter into schemes of arrangement; however, insolvent companies, companies at risk of insolvency and companies that have migrated to the BVI may.
Once a scheme is proposed, an application must be made to the court for an order that a meeting of creditors or shareholders be convened. At the meeting, a majority representing 75 per cent by value of the creditors or shareholders (or class thereof) present and voting (either in person or by proxy) must vote in favour of the scheme for it to be approved. If this majority is achieved, the court will be asked to sanction the scheme. Once the court’s sanction has been obtained, every copy of the company’s memorandum and articles of association issued thereafter must have a copy of the order approving the scheme attached to it. Unless the company is insolvent when it proposes to enter into a scheme of arrangement, the directors will remain in control of the company; if the company is in liquidation, the liquidator will have control.
There is no fixed duration for a scheme of arrangement, and its length will be determined by the directions given by the court, the expedience with which meetings are convened, and the terms contained within the scheme itself.
In the BVI, the process of devising and obtaining sanction of a scheme of arrangement outside liquidation is not protected by any moratorium on creditors’ claims; however, once the court sanctions the scheme, it becomes binding on all creditors and shareholders. Only creditors whose claims arise subsequently will be able to claim against the company during the term of the scheme. The company therefore remains at risk of aggressive creditors’ action unless it persuades the court to use its extensive discretionary powers to stay any proceedings or suspend the enforcement of any judgment or order for a specified period of time.
Plans of arrangement
If a company’s directors conclude that it is in the best interests of the company (or the members or creditors of the company) to enter into a plan of arrangement with the company’s creditors, they may formally adopt the proposed plan, after which an application must be made to the BVI court for approval.13 The court will issue certain directions such as which creditors or members should be notified, any requisite approvals and whether any shareholders should have the right to exercise their statutory right of dissent.
The directors will then confirm the plan and submit it to any other person whose approval the court directs must be obtained. Once all necessary consents have been obtained, the company must execute articles of arrangement and file copies with the Registrar of Corporate Affairs, who will register them and issue a certificate.
If dissenting shareholders who hold a simple majority vote against the plan, they have the power to prevent it from proceeding. If, however, a majority of shareholders votes in favour and the plan proceeds, any dissenting minority is bound by the majority, but dissenters have the statutory right to payment of the fair value of their shares.14
As with schemes of arrangement under the IA, the process of proposing and applying for approval of a plan of arrangement does not trigger any moratorium, so companies remain vulnerable to creditors’ claims.
Part II of the IA prescribes the procedure for creditors’ arrangements. The objective of the legislation is to make it relatively simple for the majority of the creditors of a company that is insolvent to reach an arrangement with the company for compromising the company’s debts and bind all the other unsecured creditors. As in the case of schemes of arrangement, a majority of 75 per cent of the company’s creditors by value must vote for the creditors’ arrangement.
A creditors’ arrangement may compromise all or part of the debtor’s liabilities, and may affect the rights of creditors to recover all or part of their debts; however, it may not (without written consent) affect the rights of secured creditors or cause a preferential creditor to receive less than it would have received in the liquidation of the debtor, had such a liquidation commenced at the time the arrangement was approved.15
The arrangement must be supervised by a supervisor, who must be a licensed insolvency practitioner. The procedure can be invoked even when a company is in administration or in liquidation. The most striking difference between this type of compromise and comparable regimes in other jurisdictions is that in the BVI the court is not involved, thereby (theoretically) making a binding compromise arrangement easier to bring about. However, notwithstanding these refinements, the use of creditors’ arrangements has not yet proved popular in the BVI.
As in relation to other arrangement regimes in the BVI, no moratorium arises to protect the company from creditors’ claims during the period in which a creditors’ arrangement is being prepared and approved; however, as stated above, once the majority of creditors approve the arrangement, any creditors who dissented or did not vote are bound by the majority decision, even where they did not receive notice of the meeting at which the arrangement was proposed.16
If a company is unable to reorganise itself using one of the above outlined procedures there are broadly two winding-up procedures in the BVI: liquidation by order of the court and voluntary liquidations.17
Liquidation by order of the court
The company, a creditor, a member, a supervisor of a creditors’ arrangement in respect of the company, the Financial Services Commission (FSC) or the Attorney General may apply to the court for the appointment of a liquidator on the basis that the company is insolvent, that it is just and equitable to appoint a liquidator, or that liquidation is in the public’s interest. The court will appoint the liquidator, though the company’s creditors may vote to replace the court-appointed liquidator at the first creditors’ meeting. Directors’ powers, functions, and duties cease on the appointment of a liquidator, save to the extent they are permitted by the IA or authorised by the liquidator.
A company may put itself into voluntary liquidation on either a solvent or an insolvent basis. In a voluntary solvent liquidation, the directors resolve to place the company into liquidation, but must also determine that the company is both able to pay its debts as they fall due and that its assets exceed its liabilities. Normally, the shareholders must resolve to appoint a liquidator; however, if the company’s memorandum and articles of association permit, the directors can resolve to appoint a liquidator, though in such cases it is still necessary for the shareholders to approve the liquidation plan. Liquidation commences at the time the notice of the liquidator’s appointment is filed with the BVI Registry of Corporate Affairs. Once the voluntary liquidator is appointed, the directors remain in office, but their powers cease. The liquidator is required to consider the company’s solvency on an ongoing basis. If the liquidator forms the view that the company is insolvent, he or she must convert the liquidation to an insolvent liquidation. When the company’s affairs have been wound up, any creditors’ claims satisfied, and any surplus assets distributed among the company’s members, the company is struck off the register of companies and dissolved.
For a company to voluntarily enter insolvent liquidation, its members must resolve to appoint a liquidator by passing a special resolution.18 They must then notify the liquidator of his or her appointment. Once a liquidator has been appointed in this manner, the liquidation proceeds in much the same way as in the case of a liquidation by order of the court.19
ii Enforcement of security
There are broadly seven types of security interest that can arise under BVI law: legal mortgage, equitable mortgage, equitable charge (fixed or floating), pledge, legal lien, equitable lien, and hypothecation or trust receipt. BVI companies are often used as holding vehicles either on a stand-alone basis or as part of a wider group structure when seeking to raise capital through debt financing, and there are a number of features of BVI law that make it particularly attractive to lenders to structure such transactions through a BVI entity or to use such a company as a security provider.
The enforcement of security interests is normally conducted in the jurisdiction where the relevant collateral is located. In most cases concerning the enforcement of security in assets located within the BVI, the assets in question are most likely to be shares in BVI companies. As such, most of the legal issues that arise in this context are in relation to security over shares. In practice, the common-law remedies available in the BVI are similar to those remedies available under the laws of other common-law jurisdictions.
There are several other arrangements that parties can put in place that have the effect of conferring a type of security but that do not actually create a proprietary security interest in the subject matter. For example, it is possible to grant a power of attorney or conditional option in favour of the secured party relating to shares, to enter into a retention-of-title agreement, or to execute undated transfer instruments. While these methods may provide protection for the secured party, they do not confer a proprietary interest in the assets to which they relate, and for this reason they are not subject to the same legal considerations the courts have developed in the context of conventional proprietary security interests.
The range of remedies that is available to the security holder depends to a degree upon the type of security interest. Generally, the main types of security interest that can arise in relation to shares in a BVI company are a perfected legal mortgage, an equitable mortgage, an equitable charge (which may be fixed or floating) or a possessory pledge.
In the event that there is a default on the secured obligations, the holder of a security interest over shares may have up to four primary remedies (depending upon the type of security interest which they hold): foreclosure, power of sale, receivership or taking possession.
In addition, the holder of the security can usually sue upon the covenant to pay that appears in most security documents. There are other remedies available, in particular to the holder of a mortgage, but they relate predominantly to land and are rarely exercised in relation to shares, and so are not considered further here. The holder of a security interest is entitled to pursue all of its remedies concurrently or consecutively.
Registration of security interests granted by companies is optional and not mandatory; however, unregistered security rights will be subordinated to registered charges and unregistered charges created before the BCA’s commencement date, and may encounter difficulties as against a liquidator.20
If a company goes into liquidation, the rights of secured creditors remain unaffected, unless there is a dispute over the validity of the security. After the commencement of the liquidation, the secured creditor can either value the assets subject to the security interest and, if there is a shortfall, prove for the balance as an unsecured creditor in the liquidation, or surrender his or her security interest to the liquidator and prove as a wholly unsecured creditor.
If the liquidator does not agree with the value placed on the asset by the secured creditor, he or she can require that the asset be offered for sale. The secured creditor will be paid his debt out of the proceeds of sale, and any surplus funds will be paid to the liquidator for the benefit of the general body of unsecured creditors.
A liquidator of a company in insolvent liquidation has the power to borrow money in the company’s name, if doing so is likely to be in the interests of the company’s creditors. In such circumstances the liquidator can grant post-commencement lenders security or higher priority than other creditors.21 A liquidator of a company in solvent liquidation also has the power to grant lenders security over the company’s assets; however, as stated above, the liquidator is required to keep the question of the company’s solvency under review and take care that borrowing does not cause the company to become insolvent. Unlike in some other jurisdictions, however, there is no provision in BVI legislation for the grant of super-priority status in respect of post-commencement finance, or for the grant of security over already-secured assets.
iii Duties of directors of companies in financial difficulty
In the BVI, there is no express duty on the directors of a company to commence insolvency proceedings at any particular time; however, there is a substantial body of case law from a variety of common-law jurisdictions that suggests that in certain circumstances the directors’ duty to act in the best interests of the company as a whole (and not to any individual person or class of persons)22 will require them to take account of the interests of the company’s creditors:23 the directors are expected to regard the creditors’ interests as paramount, on the basis that the interests of the company are in fact perfectly aligned with the interests of the creditors.24 In such circumstances, the directors must take those interests into account when deciding how to act until such time as solvency is restored, the company’s debts are restructured, or the company goes into liquidation.25
As to the circumstances in which this shift in the focus of the company’s interests takes place, it has variously been said that it happens when the company is insolvent or of doubtful solvency, near to or in the vicinity of insolvency, or if a contemplated payment would jeopardise the company’s solvency or cause a loss to creditors.26 On balance, we take the view that for the directors’ duty to act in the best interests of the company to be aligned with creditors’ interests instead of shareholders’, the company must actually be insolvent or very close to it.
The term ‘director’ is defined as a person occupying or acting in the position of director by whatever name he or she is called, and can include former directors in certain circumstances. ‘De facto directors’27 would be considered directors with all rights and liabilities attached to them; however, the BCA’s definition of the term ‘director’ does not include ‘shadow directors’.28 In the BVI, it is common for a company to appoint a sole director, whether that be a natural person or a corporate person.29
Part IX of the IA deals with malpractice and the principal ways in which a director may be ordered to contribute assets to an insolvent company, including liability for misfeasance, fraudulent trading and insolvent trading. An application pursuant to Part IX can only be brought by a liquidator, but the provisions are not limited territorially.
In the event that a director or officer of the company has misapplied or retained or become accountable for any money of the company, or if the director could be described as being ‘guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company’,30 then the court has broad powers to make an order that such director or officer repays, restores or accounts for money or assets or any part of it to the company as compensation for the misfeasance or breach of duty. The IA misfeasance action merely puts on a statutory footing the powers at common law, but this statutory provision does not preclude any parallel liability arising under general directors’ duties at common law or otherwise.
The court can make an order against a company’s directors if it is satisfied that, at any time before the commencement of the liquidation of the company, any of its business has been carried on ‘with the intent to defraud creditors of the company or creditors of any other person; or for any fraudulent purpose’.31 In such cases, the court can declare that the director is liable to make a contribution that the court considers proper towards the company’s assets. This is not limited to directors and officers, but applies to anyone who has been involved in carrying on the business in a fraudulent manner. There is no statutory defence to fraudulent trading, but it is necessary that actual dishonesty be proved.
If the court is satisfied that a director ‘at any time before the commencement of the liquidation of the company, knew or ought to have concluded that there was no reasonable prospect that the company could avoid going into liquidation’,32 then the court can order any director to make such contribution to the assets of the company as it considers proper.33 The court cannot make an order against a director if it is satisfied that the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, and that the director ‘took every step reasonably open to him to minimise the loss to the company’s creditors’.34 Any contribution that the court orders will be compensatory rather than penal, and the money recovered will be pooled with the general assets of the company for distribution by the liquidator. The court has broad powers to order such person to repay, restore or account for the money or assets, or pay compensation for such misfeasance.
iv Clawback actions
Part VIII of the IA provides a number of voidable-transaction claims by which a subsequently appointed liquidator may seek to recover company funds and property, thereby swelling the assets of the insolvent estate for the benefit of its creditors.
There are four types of voidable transaction that a liquidator may consider upon a company going into insolvent liquidation: unfair preferences, undervalue transactions, voidable floating charges and extortionate credit transactions. In relation to most of these, several defined terms are used: ‘insolvency transaction’, ‘vulnerability period’ and ‘connected person’.
In relation to unfair preferences, undervalue transactions, and voidable floating charges, the liquidator must show that the transaction was an ‘insolvency transaction’: the transaction in question must either have been made at a time when the company was insolvent, or have caused the company to become insolvent.35 For these purposes, ‘insolvency’ excludes balance-sheet insolvency: only cash-flow insolvency and technical insolvency are sufficient.36 The liquidator is not required to prove that an extortionate credit transaction is an insolvency transaction, and in relation to other types of voidable transactions, the court will sometimes presume that the transaction was an insolvency transaction, as explained below.
In relation to unfair preferences, undervalue transactions, and voidable floating charges, the ‘vulnerability period’ is the period beginning six months before the onset of insolvency and ending on the date on which the liquidator was appointed. If the transaction was with a person connected to the company, this period is extended to two years. In the case of extortionate credit transactions, the vulnerability period begins five years before the onset of insolvency and ends with the appointment of the liquidator. In relation to clawback actions brought in the context of liquidations, the term ‘onset of insolvency’ is defined as the date on which the application for the appointment of a liquidator was filed (in the case of insolvent liquidations by order of the court), or the date on which the liquidator was appointed (in the case of voluntary insolvent liquidations).
A person is treated as being ‘connected’ to a company if they fall within the list of persons set out in Section 5 IA. This list includes directors or members of a company or of a related company, a different company that has a common director with the company, a company that is a subsidiary or holding company of the company, and relatives of directors.
A company gives an unfair preference if it enters into a transaction that would have the effect of putting a creditor in a better position in the event of the company’s liquidation than the position in which he or she would have been if the transaction had not occurred.37 The transaction will not be an unfair preference if it was entered into in the ordinary course of business.38 As stated above, the liquidator must show that the transaction was an insolvency transaction and that it took place within the vulnerability period. If the transaction took place between the company and a connected person, it will be presumed that the transaction was an insolvency transaction and that it did not take place in the ordinary course of business, unless the contrary is proved.39
A company enters into a transaction at an undervalue if it transfers an asset to another for no consideration, or sells an asset for consideration that is worth significantly less than the asset’s market value.40 Again, and as stated above, the transaction must be an insolvency transaction and it must have taken place within the vulnerability period. The transaction will not be an undervalue transaction if it can be shown that the company acted in good faith and for the purposes of its business, and if at the time of the transaction there were reasonable grounds for believing the transaction would benefit the company.41 If the transaction is entered into between the company and a connected person, the court will presume that the transaction was an insolvency transaction and that the company did not act in good faith or have reasonable grounds for believing the transaction would benefit the company.
If the grant of a floating charge took place within the vulnerability period and was either made at a time when the company was insolvent or caused the company to become insolvent (ie, was an insolvency transaction), it will be voidable.42 If, however, the charge was not created in order to secure an existing debt, but secured new borrowing or liabilities, it will not be voidable.43 If a charge was created in favour of a connected person, it is presumed that the charge was an insolvency transaction.
Finally, a transaction is an extortionate credit transaction if it is concerned with the provision of credit to the company and either the terms of the credit arrangement require grossly exorbitant payments to be made in respect of the provision of credit (whether unconditionally or on the occurrence of certain contingencies) or otherwise grossly contravenes ordinary principles of fair trading.44 It is not necessary to show that the extortionate credit transaction was an insolvency transaction.
Despite this group of liquidator claims coming within the Part of the IA that is headed ‘voidable transactions’, a successful claim by the liquidator does not necessarily result in the transaction being voided or becoming voidable at the liquidator’s election: the court has a very broad discretion as to what relief to grant, and may make any order it deems appropriate.45 It may order that the transaction be set aside in whole or in part, but it is not required to do so; alternatively or additionally, it may make such orders as appropriate to restore the parties to their original positions or otherwise.46
III RECENT LEGAL DEVELOPMENTS
i Amendments to the BCA: compulsory filing of companies’ registers of directors
The BCA has undergone some significant changes at the end of 2015 and the beginning of 2016, the most important of which relate to companies’ registers of directors. Formerly, Section 231 permitted a company to file copies of its register of members and its register of directors with the Registrar of Corporate Affairs. The position has now changed dramatically: the BVI Business Companies (Amendment) Act 2015 repealed Section 231, replaced Section 118 with a new version, and introduced Sections 118A and 118B, which make it compulsory for every company to maintain a register of directors containing specified information and file copies with the Registrar. These new provisions were further adjusted by the BVI Business Companies (Amendment) Act 2016.
Section 118 of the BCA contains the requirement that companies maintain a register of directors. Section 118A sets out the matters that must be recorded in the register of directors: as regards individual directors, the register must include their full name, any former name, their date of appointment or nomination as a director or reserve director, the date on which they ceased to be a director or reserve director, their usual residential address, their date and place of birth, and their nationality. If the director is a corporate entity, the register must include its corporate name, its corporate or registration number, its registered or principal office address, its postal address (unless it is a BVI company, in which case its registration number suffices), the date on which it was appointed as a corporate director, the date on which it ceased to be a corporate director, and its place and date of incorporation or registration.
Section 118B requires that a company’s register of directors be filed with the Registrar. A copy is required to be filed within 21 days after the appointment of the company’s first directors. The Registrar must be notified of changes to the register within 30 days of their taking place. Failure to file the initial copy of the register of directors, and failure to file notice of changes to the register within the relevant periods each attract a penalty of US$100.
Existing companies have until 31 March 2017 to bring themselves into compliance with these provisions. If they fail to do so, they will charged a penalty of US$300 for the first month of non-compliance, US$500 for the next period of three months (or part thereof), and US $750 for the following three months. If they still have not brought themselves into compliance within seven months of 31 March 2017, they face a penalty of US$1,000 for each month that their failure continues thereafter.47
Despite this new requirement that the Registrar have details of all companies’ directors, these registers are not publicly available. Any person wishing to inspect the copy of a company’s register of directors must apply to the court for an order. In addition, certain ‘competent authorities’ may be entitled to request to inspect the registers. Section 118B does not set out the basis on which the court may make an order permitting an applicant to inspect the copy of a company’s register of members filed with the Registrar, nor does it state who has standing to make such an application or what must be proved;48 nevertheless, it seems likely that Section 118B provides a route by which a person may seek to obtain disclosure of a company’s register of directors, and the court’s jurisdiction to allow inspection is likely to be the subject of development in the coming years.
The option to file a register of members with the Registrar is contained in the new Section 43A of the BCA. Where a company elects to file a register of members, it is bound by the copy of the register that is filed with the Registrar until such time as it files a change or notice that it intends to cease registration of the register. It should be noted that Section 43A, unlike Section 118B, does not suggest that registers of members filed with the Registrar may be disclosed by order of the court or to ‘competent authorities’.
ii A lone creditor seeking the appointment of a liquidator may not be outvoted by the majority
In Krios Holdings Pte Limited v. Shefford Investments Holding Limited (2016) BVIHC (COM) 131 of 2015 (unreported), the BVI court emphasised the discretion it has whether or not to grant an application for the appointment of a liquidator; however, there is nothing preventing the court from granting the application even where the vast majority of the company’s other unsecured creditors oppose it.
The company had provided a guarantee in relation to its parent company’s obligations under an agreement entered into with the creditor. The parent defaulted on its obligations and the creditor served a demand on the company under the guarantee. The company failed to pay, so the creditor served a statutory demand. No payment or other response was forthcoming, and the creditor applied for the appointment of a liquidator on the ground of the company’s insolvency. Notices of opposition were served by the company and six creditors, including the parent. The unsecured claims of the opposing creditors were worth some US$185 million – substantially greater than the debt owed to the creditor.
The company proposed a reorganisation in Singapore as opposed to liquidation in the BVI, and a moratorium was obtained in Singapore; however, it appeared that under the terms of the contemplated reorganisation unsecured creditors would be limited to receiving 50 cents in the dollar.
Bannister J considered the case of in Re Demaglass Holding Ltd,49 in which Lord Neuberger identified a number of fundamental principles. First, the court has a broad power to grant the petition, dismiss it, or adjourn it conditionally or unconditionally. Second, the petitioner must establish the possibility of the prospect of some sort of benefit from liquidation (though this is a low threshold). Third, the starting point is that a creditor who has not been paid a debt that is due is virtually entitled to a winding-up order as of right, unless there is a good reason not to grant it such that it is not a discretionary matter. Fourth, it is not decisive that the majority of creditors support the application. Fifth, the court will give little weight to the views of secured creditors, will have greater regard to independent creditors than to those creditors who are connected to the debtor, and will not normally enter into an examination of mathematical niceties. Sixth, it is not enough that the majority of creditors oppose a petition for the court to refuse to grant it: the court must be satisfied that there is a good reason not to grant the petition. Finally, if the court is satisfied that the majority of the creditors oppose the petition and have good grounds to do so, it must carry out a balancing exercise between the interests of the creditors and the interests of the petitioner.50
Applying the decision in Demaglass, Bannister J held that the court’s exercise of discretion would not be made subject to a ‘head count’. He refused the adjournment and granted the creditor’s application. This is a salutary reminder of the standing of a creditor with a debt that is due to seek the appointment of a liquidator, and it will be for the company and its other creditors to produce a clear case why the order should not be granted.
iii Departure from English approach to stay of liquidation proceedings in favour of arbitration
The Court of Appeal of the Eastern Caribbean Supreme Court has recently indicated that the BVI courts should take a different approach from that taken in England and Wales in relation to applications to stay liquidation proceedings in favour of arbitration. The case of Jinpeng Group Ltd v. Peak Hotels and Resorts Ltd concerned a loan agreement that contained a clause by which the parties could agree that the creditor’s right to repayment could be converted into shares in the debtor; however, if the parties failed to sign an agreement by a specified date the loan would have to be repaid in full.51 The loan agreement contained an arbitration clause submitting disputes to arbitration.
No agreement for the conversion of the debt was concluded in time, and the creditor subsequently applied for the appointment of a liquidator over the debtor, asserting that it was a creditor but relying on the just and equitable ground. The debtor applied to strike out the creditor’s application because the creditor’s claim was disputed in light of the right to conversion; the debtor applied in the alternative for an order staying the application because arbitration proceedings were pending.
On the hearing of the strike-out application, the judge indicated that he should not enter into an analysis of the evidence on a summary basis and that he would only permit the creditor’s application for a liquidator to continue if the debtor’s dispute as to the creditor’s standing was hopeless. He found that Peak’s dispute passed this very low threshold, so struck out the originating application and discharged the order appointing the provisional liquidators. Accordingly, he did not express a view on the application to stay in favour of arbitration.
The creditor appealed. The Court of Appeal held that the judge had applied the wrong test: he should have asked whether or not the dispute raised by Peak in relation to the debt Jinpeng claimed was ‘raised on genuine and substantial grounds’. The debtor’s dispute did not pass this threshold, so the originating application should not have been struck out.
Having reached this conclusion, the Court of Appeal had to consider the debtor’s stay application. The court noted the position at English law, according to which a party needed only to raise a dispute that came within a valid arbitration agreement for a stay to be imposed and it was not necessary for the court to balance the level or quality of the dispute.52
The court observed that the appointment of a liquidator was a class remedy and not a claim by a creditor to recover its debt.53 It held that as the dispute had come before the court by way of this class remedy, it appeared as an issue not simply between the debtor and the creditor, but between the debtor and all its creditors: the creditor had invoked the court’s jurisdiction not on its own account but as a member of a class. Collective proceedings were not covered by the arbitration clause or by the Arbitration Act 2013, and the court should not, therefore, grant an automatic stay merely because the debtor had raised a dispute as to the creditor’s status as creditor.54 Whereas in England and Wales the authorities indicated that the court should nevertheless grant the stay absent exceptional circumstances, so as to support the policy of the legislation, the BVI court should not follow this approach: if the dispute came within the mandatory provisions of the Arbitration Act 2013, a stay would be virtually automatic; if it did not, the creditor was not to be deprived of standing, save where ‘genuine and substantial grounds’ could be shown; it would be unjust to require the creditor who was otherwise entitled to bring the application to show exceptional circumstances.55
The full impact of this decision remains to be seen, and it is not inconceivable that the Privy Council may be required to consider the issues raised. It is at least arguable that the question of a creditor’s standing to bring an application does not relate to the class remedy he seeks but to the relationship between him and the alleged debtor: it is only if he can prove that the necessary relationship exists that he is entitled to ask the court to commence the collective proceedings. Given the increasing importance of arbitration internationally and the emphasis courts and international bodies place on the proper recognition and implementation of arbitration agreements and awards, it is possible that this decision will be revisited before too long.
When framing the final scope of the IA, the drafters were cognisant of the BVI’s position as a premier offshore jurisdiction and the numerous cross-border issues this brings. Part XIX of the IA provides the basic statutory framework for judicial assistance in insolvency proceedings. It allows foreign representatives in certain types of insolvency proceedings (i.e., collective judicial or administrative proceedings in which the property and affairs of the debtor are subject to control or supervision by a foreign court taking place in designated territories) to apply to the BVI court for assistance.
The BVI court, when faced with such an application, is required to do what will best ensure the economic and expeditious administration of the foreign proceedings, to the extent that that is consistent with certain guiding principles. The orders that the court can make in aid of the foreign proceedings are wide, and include orders:
- a restraining the commencement or continuation of proceedings against a debtor or in relation to the debtor’s property;
- b restraining the creation, exercise or enforcement of any rights against the debtor’s property;
- c requiring a person to deliver up the property of the company to the foreign representative;
- d making any order or granting any relief the court considers appropriate to facilitate, approve or implement arrangements that will result in the coordination of BVI insolvency proceedings with foreign insolvency proceedings;
- e appointing an interim receiver of any property of the debtor; and
- f making such other order or granting such other relief as it considers appropriate.56
The provisions appear to be wide enough for the BVI court not only to provide procedural assistance but also to apply substantive principles of BVI insolvency law, and the BVI court has discretion whether to apply the law of the BVI or the law applicable to the foreign proceedings.
The BVI courts have had a number of opportunities to consider the scope of Part XIX. In Irving H Picard v. Bernard L Madoff Investment Securities LLC,57 Mr Pickard, the trustee appointed in the US liquidation of Bernard L Madoff Investment Securities LLC, sought (1) recognition in the BVI as a foreign representative, (2) permission to apply to the BVI court for orders in aid of the foreign proceedings, and (3) permission to require any person to deliver up to him any property belonging to the company. Deciding the case against Mr Pickard, Bannister J held that foreign representatives are confined to relying upon Part XIX, because the legislature had decided not to bring the alternative provisions in Part XVIII into force. The key difference between the two Parts was that whereas Part XVIII conferred status on foreign representatives through recognition of the foreign proceedings, Part XIX merely gave the foreign representative express rights to apply to the court for orders in aid, but without conferring status. The codification of rules on recognition of foreign office holders in Part XVIII had resulted in the implied repeal of the common-law rules of recognition, so Mr Pickard could only rely on the support afforded by Part XIX. The court then held that because Part XIX operated on an ‘application-by-application’ basis it could not give Mr Pickard any general authority or special status, but would have to hear individual applications for specific orders.
In Re FuturesOne Diversified Fund SPC Ltd,58 the court had to consider the position of a receiver appointed by the United States District Court for the Northern District of Illinois on the application of the United States Commodity Futures Trading Commission. An application had been made by the joint liquidators of certain funds incorporated in the BVI for a declaration that they had been validly appointed. The receiver applied to be added to the proceedings, either under the court’s inherent jurisdiction or under Section 273 of the IA as a person ‘aggrieved by an act, omission or decision’ of a company liquidator so that he could oppose the liquidators’ application and seek orders reversing everything that had been done, on the basis that it was done to avoid the effect of the order by which the receiver had been appointed. He also sought an order under Section 467 of the IA in support of the Illinois proceedings staying the BVI liquidations.
This case was also heard by Bannister J. In relation to the latter application, his Lordship held that the ability to make orders in aid of foreign proceedings was limited to foreign proceedings for the purpose of ‘reorganisation, liquidation or bankruptcy’, and that on the evidence before the court it appeared that the purpose of the US receivership was to protect investors rather for any of the specified purposes. Accordingly, Bannister J held that the US-court-appointed receiver had no standing to make any application under Section 467 of the IA. In relation to the receiver’s application to reverse the acts of the liquidators, the court held that the liquidators’ claim that they had been appointed was not an ‘act, omission or decision’ of the joint liquidators within the meaning of the Act, so the receiver did not have standing under Section 273 of the IA. In any event, having concluded that the liquidators were validly appointed, the judge held that there was nothing that could have prejudiced the receiver.
The case of In the Matter of C (a bankrupt) concerned an application brought by trustees in bankruptcy who had been appointed under the laws of Hong Kong for recognition in the BVI of the Hong Kong proceedings and the trustees’ appointment. Bannister J reviewed his earlier decision in Pickard v. Bernard Madoff Investment Securities LLC (supra) and stated that Part XIX was not an exhaustive code in relation to the court’s jurisdiction to assist foreign insolvency officials: the effect of Section 470 of the IA was to preserve the common-law jurisdiction to assist foreign representatives as defined in Section 466 IA.59 If the foreign office-holder came within that definition, the powers of the court in Part XIX would be available in addition to the common-law powers that had existed prior to the enactment of the IA. His Lordship also clarified the scope of that jurisdiction, stating that it was effectively limited to making orders for the purposes of preserving the integrity of the foreign bankruptcy procedures. He rejected submissions that if a foreign insolvency official were recognised by the BVI courts, they should be treated as having all the powers of an equivalent insolvency official under BVI law.
i UNCITRAL Model Law
Part XVIII of the IA adopts the UNCITRAL Model Law on Cross-Border Insolvency for giving and seeking assistance in insolvency proceedings; however, as stated above, this Part has not been brought into force, and the generally held view is that it is unlikely to come into force; as with administration orders, however, this may be reconsidered in the future.
ii Liquidation of foreign companies
It should be stressed that the BVI courts will exercise insolvency jurisdiction over all companies registered in the BVI as of right, even if such a company does not have any assets in the BVI or has the its centre of main interests in another jurisdiction. The various insolvency regimes provided for in the IA and discussed in more detail above in this chapter are all available in relation to BVI companies, notwithstanding that they may not conduct business in the jurisdiction or indeed have any connection with the BVI other than the fact of their incorporation there.
The position with respect to companies that are not incorporated or registered in the BVI (defined as ‘foreign companies’ under the IA) is different. Foreign companies can enter into liquidation (through a court-appointed liquidator) provided that they have a sufficient connection with the BVI. For these purposes, ‘connection’ has a statutory definition and means the presence of assets in the BVI, the carrying on of business in the BVI, or the reasonable prospect that the appointment of a liquidator in the BVI will otherwise benefit the creditors of the company. Even if such a connection is established, the BVI court retains discretion regarding whether or not to appoint a liquidator. Administration and creditors’ arrangements are not available to foreign companies.60
iii Concurrent proceedings
If a BVI company has been wound up or is in the process of being wound up by a foreign court, it can nevertheless be placed in liquidation in the BVI by either of the two routes available (i.e., the appointment of a liquidator by the court or by the members of a company). A foreign company that is in liquidation abroad may also be placed in liquidation, but only through the mechanism of a court-appointed liquidator.
In such situations, the liquidation of the company in its place of incorporation will generally be regarded as the primary liquidation and, in common-law countries at least, all others will be treated as ‘ancillary’ or secondary liquidations in which the liquidator’s powers will be confined to collecting and distributing the assets in that jurisdiction.
If a liquidator is appointed over a BVI company, he or she becomes the appropriate person to deal with the company’s assets in place of the directors. The liquidator will be recognised as having the authority to administer the assets of the company worldwide, but the recognition of his or her authority abroad is effectively a matter for the foreign courts in the relevant jurisdiction. Most common-law jurisdictions will generally recognise a liquidator of a foreign company appointed by the court of the place of incorporation.
V FUTURE DEVELOPMENTS
There may be some movement in the jurisdiction towards the enactment of administration or an alternative regime that would be accompanied by at least a short-term moratorium on creditor enforcement.
The administration process is an alternative to liquidation for financially distressed companies; however, whereas the objective of liquidation is to realise the company’s assets for the benefit of its unsecured creditors, administration seeks to preserve the company as a going concern.
An application is made to the BVI court for an administration order. If the order is granted, then an administrator (who must be a licensed insolvency practitioner) is appointed to administer the company’s assets; however, once the order is made, there is a moratorium on the exercise of creditors’ rights. None of the company’s creditors – including its secured creditors – may enforce their rights against the company while the order is in effect.
Under English law it is only necessary to show that an administration order is ‘likely to’ achieve one of the statutory purposes; however, in the BVI the requirement is to show that it ‘will’. Another important difference is that in the BVI an administration order can be made if it will facilitate the rehabilitation of a group of companies of which the company in question is a member, whereas under the UK legislation the order must be for the benefit of that specific company.
While it would appear unlikely at this stage that Part XVIII will be enacted to introduce the model-law on cross-border insolvency, an extension of the countries designated by the FSC to which assistance will be extended would appear likely.
1 Ian Mann and Andrew Thorp are partners and Mark Rowlands is an associate at Harney Westwood & Riegels.
2 OIL, Offshore 2020 Report 2015: the New Normal, p. 14, Fig. 14.
3 Ibid., pp. 11 to 12, Figs. 10 and 11.
4 OIL, The Offshore Industry in 2020: the BVI and the rise of super jurisdictions, January 2016 (accessed 4 July 2016): www.oilglobal.com/insights/the-Offshore-Industry-In-2020-The-BVI-and-the-rise-of-super-jurisdictions.
5 Review of Financial Regulation in the Crown Dependencies (Cmnd Paper 4855 of 2000). HMSO. Part III, Paragraph 1.3. ISBN 0 10 148554 9. Retrieved 19 September 2014.
6 McKinsey & Company, ‘Building on a thriving & sustainable Financial Services sector in the British Virgin Islands’, Final report, December 2014, p. 7.
7 Q1 2016 BVI Financial Services Commission Statistical Bulletin Vol. 42. There are no recent official statistics on total number of incorporations (including struck-off, liquidated and dissolved companies), but these are estimated at approximately 950,000.
8 Ibid, p. 4.
9 ‘The Russians are coming’, Financial Times, 12 April 2007 (accessed 4 July 2016): http://www.ft.com/cms/s/0/2aec1ac0-e893-11db-b2c3-000b5df10621.html#axzz4DRmwjauT
10 For example, the Hong Kong Court of Appeal in the case of Re Legend International Resorts Ltd  2 HKLRD 192 (HKCA) at 203f to i,  (Rogers VP); and Re Luen Cheong Tai International Holdings Ltd  2 HKLRD 719.
11 Re Plus Holdings Ltd  2 HKLRD 725 at 728e to 729i,  to  (Kwan J).
12 Pursuant to Section 179A BCA.
13 It is possible for a company in voluntary liquidation to enter into a plan of arrangement: in such a case, the liquidator completes the necessary procedural formalities; however, if a company is in insolvent liquidation, the liquidator is required to authorise the directors to take the procedural steps set out in the BCA.
14 In the event that ‘fair value’ cannot be agreed upon between the shareholders, there is a mechanism under Section 179 BCA to resolve the matter by reference to independent but party-appointed appraisers.
15 Section 15 IA.
16 However, in certain circumstances creditors, members and other persons may apply to the court for relief on the basis that their interests have been unfairly prejudiced by the arrangement: Section 43 IA.
17 It is important to note that the BVI legislation does not use the sometimes-arcane language of the UK legislation: it refers to ‘applications for the appointment of a liquidator’ rather than ‘winding-up petitions’.
18 Section 159(2) IA. Voluntary insolvent liquidation may also be used by companies where the directors are not comfortable signing a declaration of solvency.
19 Section 175 et seq IA.
20 Section 166 BCA. See also Re Bond Worth Ltd  Ch 228.
21 Section 186 and Schedule II, Paragraph 11 IA.
22 Percival v. Wright  2 Ch 421; Re Smith & Fawcett Ltd  Ch 304 (CA); Multinational Gas and Petrochemical Co v. Multinational Gas and Petrochemical Services Ltd  Ch 258; and Grove v. Flavel (1986) 43 SASR 410 (SCSA).
23 Walker v. Wimbourne and others (1976) 137 CLR 1 (HCA) at 6 to 7 (Mason J). Whether or not the directors or the company owe a duty to creditors in such circumstances does not appear to be settled: the preponderance of the academic authorities asserts that directors have a duty to consider creditors’ interests but not a duty to creditors to act in their best interests; however, some authorities argue that there is a duty owed to creditors as a whole.
Arguing for a duty: Nicholson v. Permakraft (NZ) Ltd  NZLR 242 at 249 to 250 (Cooke J) (but this view was not concurred in by Richardson or Somers JJ); Hinnant, W. ‘Fiduciary Duties of Directors: How Far Do They Go?’ (1988) 23 Wake Forest Law Review 163; and Sappideen, R. ‘Fiduciary Obligations to Corporate Creditors’  JBL 365; moreover, some argue that an independent duty is sustainable on the basis of Walker v. Wimbourne and others (1976) 137 CLR 1 (HCA); and Winkworth v. Edward Baron Development Co Ltd and others  1 WLR 1512 (HL(E)) at 1516 (Lord Templeman).
Arguing against a duty: Nicholson v. Permakraft (NZ) Ltd  NZLR 242 at 255 (Richardson J) and 255 to 256 (Somers J); Worthington, S. ‘Directors’ Duties, Creditors’ Rights and Shareholder Intervention’ (1991) 18 MULR 121 at 151; Sealy, L. ‘Personal Liability of Directors and Officers for Debts of Insolvent Corporations: A Jurisdictional Perspective (England)’ in Ziegel, J. (ed), Current Developments in International and Comparative Corporate Insolvency Law (Oxford: Clarendon Press, 1994) p 486; Yukong Lines Ltd of Korea v. Rendsburg Investments Corporation of Liberia and others (No 2)  1 WLR 294 (QB) at 312 (Toulson J); Spies v. The Queen (2000) 201 CLR 603 (HCA) at  (Gaudron, McHugh, Gummow, and Hayne JJ); Caron Bélanger Ernst & Young Inc as trustee to the bankruptcy of People’s Department Stores Ltd (1992) Inc v. Wise and others  SCC 68; and North American Catholic Educational Programming Foundation Inc v. Gheewalla and others 930 A2d 92, 99 (Del 2007) at 19 to 24 (Holland J).
24 Colin Gwyer & Associates Ltd and another v. London Wharf (Limehouse) Ltd and others  BCC 885 (Ch) at 906,  (Leslie Kosmin QC sitting as a deputy High Court judge).
25 Kinsela and another v. Russell Kinsela Pty Ltd (in liquidation) (1986) 4 NSWLR 722 at 730b (Street CJ).
26 Nicholson v. Permakraft (NZ) Ltd  NZLR 242 at 249 (Cooke J) and 256 (Somers J); Kinsela v. Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 at 730 (Street CJ); Brady v. Brady (1987) 3 BCC 535 (CA) at 552 (Nourse LJ); Liquidator of West Mercia Safetyware Ltd v. Dodd and another (1988) 4 BCC 30 (CA) at 33 (Dillon LJ); Facia Footwear (in administration) v. Hinchliffe  1 BCLC 218 (Ch) at 228b to c (Sir Richard Scott VC); and Dynasty Line Ltd (in liquidation) v. Sia Sukamto and another  SGCA 21 at  to  (Sundaresh Menon CJ).
27 Persons acting as directors and carrying out their functions but without formal appointment as directors.
28 The term ‘shadow director’ is given a statutory footing in the UK, and is defined by Companies Act 2006, Section 251, as ‘a person in accordance with whose directions or instructions the directors of a company are accustomed to act’; see also Revenue and Customs Commissioners v. Holland and another; In re Paycheck Services 3 Ltd and others  UKSC 51,  1 WLR 2793. Although the BCA definition of ‘director’ does not extend to shadow directors, the IA definition does, save in the context of Parts IX and X of the IA, which relate to malpractice and disqualification respectively: Section 6 IA. The IA definition is in almost identical terms to the UK legislation, with the insertion of the words ‘may be required or’ before ‘are accustomed to act’. The consequence is that while shadow directors may not be subject to claims for breaches of duties owed under the BCA, they may find themselves defending IA claims by liquidators or other entitled persons.
29 In Revenue and Customs Commissioners v. Holland and others (op cit), the UK Supreme Court held that where a corporate person is a sole director (in that case of an English company), the directors of the corporate person will not be regarded as shadow directors or de facto directors of the company. This is likely to be persuasive in BVI law.
30 Section 254 IA.
31 Section 255(1) IA.
32 Section 256(1) IA.
33 Section 256(2) IA.
34 Section 256(3) IA.
35 Whether or not a transaction caused a company to become insolvent is a question of fact to be determined by applying the ordinary rules of causation, which in some cases concerning financially distressed companies can be very complex.
36 Section 244(3) IA.
37 Section 245 IA. Note that in the BVI (unlike in many other common-law jurisdictions) it is not necessary that the liquidator show that the transferor had any intention or desire to achieve this result for the recipient.
38 Section 252(2) IA.
39 In such cases it is still necessary to show that the transaction took place in the vulnerability period.
40 Section 246 IA.
41 Section 246(2) IA.
42 Section 247 IA.
43 Section 2474(2) IA.
44 Section 248 IA. It is not sufficient that the transaction is merely unfair; it must be oppressive.
45 Section 249 IA.
46 See also Section 250 IA.
47 Section 118B(9) and Schedule I, Part II, BCA.
48 Section 118B(4) BCA.
49  2 BCLC 633 (Ch).
50  2 BCLC 633 (Ch) at 637h to 640b.
51 (2015) HCMAP 25 of 2014 and 3 of 2015 (unreported).
52 Referring to the Arbitration Act 1996, Halki Shipping Corporation v. Sopex Oils Ltd  1 WLR 1268 (QB), and Applied Enterprises Ltd v. Interisle Holdings Ltd and others (2013) BVIHCV (Com) 135 of 2012 (unreported).
53 Referring to C-Mobile Services Ltd v. Huawei Technologies Co Ltd (2015) HCMAP 17 of 2014 (unreported) at  (Webster JA).
54 The court relied on Salford Estates (No. 2) Ltd v. Altomart Ltd (No. 2)  EWCA Civ 1575,  Ch 589 and the C-Mobile case cited above.
55 (2015) HCMAP 25 of 2014 and 3 of 2015 (unreported) at p. 25,  (Webster JA).
56 Section 467 IA.
57 (2010) BVIHCV 140 of 2010 (unreported).
58 (2013) BVIHCM (COM) 113, 114, 115 and 116 of 2012 (unreported).
59 This Section requires that the foreign office holder be a person acting as an office holder in insolvency proceedings in a relevant foreign country designated as such by the Financial Services Commission of the BVI. If the jurisdiction in which the foreign office holder was appointed has not been designated by the FSC, Section 470 is of no assistance. This does however conflict with an earlier unreported decision where assistance pursuant to the common law was granted to a foreign insolvency professional from Curaçao, a jurisdiction lying outside FSC designation.
60 It is possible to migrate a foreign company to the BVI for the purpose of making use of the BVI’s restructuring options under Part X BCA.