I INSOLVENCY LAW, POLICY AND PROCEDURE
i Statutory framework and substantive law
British Virgin Islands (BVI) law is a mixture of statute and common law. The principal statute governing corporate and personal insolvency in the BVI is the Insolvency Act 2003 (the Act), which is supported by the regulations set out in the Insolvency Rules 2005 (the Rules).
The fundamental principle underlying BVI insolvency law, which closely follows English law in many respects, is the pari passu treatment of creditors. Accordingly, subject to contractual arrangements to the contrary, and to a very small category of preferential creditors (which rarely amounts to anything in practice), unsecured creditors share equally in the assets of an insolvent company available for distribution. The Act specifically recognises and protects the rights of secured creditors to enforce their security, and secured creditors do not compete with unsecured creditors in respect of the secured element of their claim. The commencement of BVI insolvency proceedings does not affect the ability of a secured creditor to enforce its security in accordance with its terms.
The Act provides for a range of transactional avoidance provisions designed to give effect to the pari passu principle, including the avoidance of preferential payments to creditors and transactions at an undervalue. The Act also provides remedies for fraudulent and insolvent trading.
The policy issues underlying the treatment of insolvent companies in the BVI are those applicable to a major offshore financial centre. BVI companies are widely used as holding companies for investment vehicles and for structuring purposes, and the BVI legal environment is, therefore, creditor-friendly and predictable.
As such, while there are procedures available – principally by way of a scheme of arrangement – whereby debt and company restructurings can be promoted, the BVI currently has no specific rehabilitation procedure equivalent to Chapter 11 in the United States or administration in England and Wales. There is an administration process set out in the Act, but it has never been brought into force and its status is currently under review.
iii Insolvency procedures
The principal insolvency procedure for insolvent BVI companies is liquidation, which is described in more detail below.
One of the remedies of a secured creditor is to appoint a receiver or administrative receiver to deal with the secured assets. Those remedies have statutory recognition under the Act. Receivers are regularly appointed over the assets of BVI companies by the holders of security over those assets. Because a BVI company’s assets are typically outside the BVI, such receivers are predominantly appointed in the jurisdictions in which those assets are located, whether pursuant to the provisions of security governed by BVI law or pursuant to the provisions of local law. The Act imposes only a minimal layer of administrative burden in the BVI for receivers appointed abroad, which is essentially limited to giving notice of the appointment to the company in the BVI and the Registrar of Companies.
A procedure called a creditors’ arrangement can also, in theory, be used to reorganise and compromise a company’s debts. In practice, however, this is little used because it does not provide for a moratorium on creditors’ claims while it is implemented.
Liquidation is overwhelmingly the most common insolvency procedure, and is, therefore, the focus of this chapter. Liquidation involves the appointment of one or more liquidators for the purposes of collecting in and realising the company’s assets, and distributing the proceeds of the assets to those entitled to them in the order of priority prescribed by the Act.
iv Starting proceedings
An insolvent liquidation can be initiated out of court by resolution of the shareholders of the company, or it can be commenced by application to the court by a creditor, the company itself, the shareholders, the supervisor of a creditors’ arrangement, the Financial Services Commission or the Attorney General.
When an application is made to court for the appointment of a liquidator, notice of the hearing must be published in the jurisdictions in which the company did business, with the aim of bringing the hearing to the notice of the company’s creditors. Those creditors are entitled to appear and be heard on the application to court. Generally speaking, if an unpaid, undisputed creditor applies for the appointment of a liquidator on the grounds that the company is insolvent, the court will ordinarily exercise its discretion in favour of appointing a liquidator; however, if the majority of creditors oppose the appointment of a liquidator for good reason, the court may (but will not be bound to) have regard to their views.
v Control of insolvency proceedings
Plenary insolvency proceedings in the BVI are controlled by the company’s liquidator. The liquidator’s powers derive from the Act. In a court-appointed liquidation they will also be subject to the terms of the order appointing the liquidators. Typically, if the liquidator in a court-commenced liquidation wants to exercise significant powers such as the sale of assets and the bringing of legal proceedings, he or she will require the court’s sanction to do so on an application made specifically for that purpose.
Except where the order appointing the liquidator specifically requires the liquidator to seek sanctions, the court’s involvement with the liquidation will otherwise be relatively limited. The liquidator is entitled – and indeed expected – to use his or her skill and professional judgement and to run the liquidation using his or her own discretion. It should be noted in this regard that the BVI has a licensing regime for insolvency practitioners, operated by the Financial Services Commission, and only a BVI-licensed insolvency practitioner (and occasionally a similarly qualified foreign appointee who takes the appointment jointly with a BVI licensee) can be appointed as the liquidator of an insolvent BVI company.
Nevertheless, the court has overall control over the liquidation. Liquidators are entitled to – and frequently do – ask the court for directions about difficult questions or as to whether to pursue particular courses of action arising in a liquidation, even if they do not need formal sanction to exercise particular powers. Creditors and those with a legitimate interest in the liquidation are also entitled to apply to court for assistance, for example, if they are dissatisfied with a decision of the liquidator or the liquidator rejects their claim. A liquidation with significant numbers of creditors will often have a formal creditors’ committee, which will provide a sounding board for the liquidator.
Liquidators’ fees are generally approved either by the creditors’ committee (if there is one) or the court (if not). In the event that there is a single creditor funding the liquidation directly, such that the liquidators’ fees are not taken from the assets of the company, court practice is usually to leave the approval of those fees to the creditor in question.
Once a liquidator of a BVI company is appointed, the directors’ powers effectively cease, but the directors are required to assist the liquidator and can be ordered to provide information and deliver up assets or records in their hands to the liquidator.
vi Special regimes
Other than some modifications of the provisions of the Act for insurance companies, and provisions enshrining the effectiveness of netting arrangements in financial contracts, there are no special regimes applicable to different types or groups of BVI companies.
vii Cross-border issues
Part XIX of the Act gives the court power to make orders in aid of foreign insolvency proceedings in certain designated countries. The court’s powers under this part of the Act are broad; for example, the court may restrain proceedings against the debtor or its property, require a person to deliver up property of the debtor to the foreign representative, or facilitate the coordination of BVI insolvency proceedings with foreign proceedings.
In exercising these powers the court can apply the laws of the BVI or of the foreign proceeding, but the court must take into account, inter alia, the just treatment of all persons claiming in the foreign proceeding, the protection of persons in the BVI who have a claim against the debtor, and the need for distributions in the foreign proceedings to be substantially in accordance with the order of distributions in a BVI insolvency.
Part XVIII of the Act contains provisions based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency, but that part of the Act has never been brought into force and is currently under review. The subject of recognition of foreign insolvency representatives at common law and its relationship with statutory insolvency provisions has been a hot topic in the BVI in recent years – as it has in England and other offshore jurisdictions, notably the Cayman Islands, Bermuda and the Isle of Man – particularly in light of the Privy Council and English Supreme Court decisions in Cambridge Gas Transportation Corp v. Official Committee of Unsecured Creditors of Navigator Holdings Plc and ors2 and Rubin v. Eurofinance.3
In the BVI, the question of whether common law recognition is available alongside the statutory provisions in the Act was thought to have been settled in 2010 in Picard v. Bernard L Madoff Investment Securities LLC;4 when Irving Picard (the trustee for the liquidation of BLMIS) sought recognition as a foreign representative under Part XIX of the Act.
The Commercial Court refused Mr Picard’s application on the principal ground that it was not possible for a foreign representative to obtain recognition at large and that foreign representatives are confined to the granting of specific discretionary relief. In reaching this conclusion, the Court considered the interplay of Parts XVIII and XIX of the Act. Part XVIII contains cross-border insolvency provisions that essentially adopt the UNCITRAL Model Law on insolvency. However, as stated above, Part XVIII is not in force. Part XIX on the other hand contains provisions allowing for foreign representatives in insolvency proceedings from a specified list of countries (each a ‘relevant foreign country’) to seek orders in aid of those proceedings from the BVI courts.
The BVI Commercial Court decided that Part XVIII (although not in force) and Part XIX together were a complete code for the recognition of foreign insolvency appointees, such that no common law basis for recognition survived. As a consequence, only a foreign representative from a relevant foreign country could seek the assistance of the BVI court, and that assistance would be limited to the relief available under Part XIX.
However, in In the matter of C (a bankrupt) 5 the Commercial Court was invited to reconsider its decision in Picard on the application of Hong Kong trustees in bankruptcy (Hong Kong being a relevant foreign country). The trustees applied for recognition at common law of the bankruptcy proceedings and their standing as trustees. They asked that by way of assistance upon such recognition, they be granted the powers that they would have had if they had been appointed as bankruptcy trustees under the Act. Alternatively, they sought declarations that they were the validly appointed Hong Kong trustees of the bankrupt’s estate and entitled to deal with the bankrupt’s estate in the BVI. They also sought disclosure orders against various registered agents of BVI companies said to be owned by the bankrupt.
The applicants argued that Picard had been wrongly decided and that common law recognition was still in principle available for all foreign insolvency appointees, and had not been legislated away; and that the common law allowed the court to provide a foreign appointee with the statutory remedies that would be available on a domestic insolvency.
The judge considered the historic line of English and Privy Council authorities culminating in Schmitt v. Deichman,6 as well as the Cayman Islands Grand Court decision in Picard v. Primeo Fund7 and disagreed with the applicants’ arguments other than in one important respect.
The judge followed his decision in Picard and confirmed that the common law approach to recognition and assistance does not generally survive in the BVI in parallel with the Insolvency Act. However, he found that Section 470 of the Act (found in Part XIX) preserves the common law principle of recognition and assistance for a foreign representative from a relevant foreign country, alongside the statutory provisions of Part XIX.
As to the trustees’ second argument, the judge found that ‘what the Court does when recognising foreign proceedings at common law is to deploy its own powers in aid of the foreign proceedings. It does not invest the foreign office holder with powers of his own’, and that ‘the Court has no jurisdiction to confer upon a stranger powers which a statute confers only upon individuals accepting specified appointments under the statute’.
In making these findings, the judge expressly departed from Schmitt v. Deichman and he also disagreed with the decision of Jones J in Picard v. Primeo Fund to the extent that Jones J’s decision went beyond the ambit of the types of common law assistance delineated in Rubin.
The Privy Council decisions in Singularis Holdings v. PricewaterhouseCoopers and PricewaterhouseCoopers v. Saad Investments Company Limited (both 2014) may also impact the ability of foreign office holders to obtain assistance from the BVI courts, and some writers have suggested that the views expressed by the court in Re C may need to be revisited as a result, at least insofar as the decisions may allow foreign office holders from non-designated countries to apply to court for orders compelling the production of documents and information.
In May 2017, the BVI adopted the Judicial Network guidelines for communication and cooperation between courts in cross-border insolvency matters. These guidelines have also been adopted by a number of other jurisdictions including England and Wales, Singapore, Bermuda and Delaware.
II INSOLVENCY METRICS
Because of the BVI’s very small local economy and its status as an offshore financial centre, the status of the real economy as it affects corporate insolvency in the jurisdiction very much matches the state of the wider world economy and of the markets that use BVI companies. There are no publicly available statistics recording the numbers of insolvent liquidations of BVI companies.
III PLENARY INSOLVENCY PROCEEDINGS
The following is a round-up of some of the most interesting and legally or commercially significant ongoing liquidations and decisions from the BVI courts during the past 12 months.
i Fairfield funds
The liquidations of the three Fairfield funds (Sentry, Sigma and Lambda) continue to be the most high-profile in the BVI and to generate interesting new law. Together with the Kingate funds (which are also BVI funds in liquidation), the Fairfield funds were fully invested with Bernard L Madoff Investment Securities LLC (BLMIS) and lost all or substantially all of their net asset value (NAV) as a result of Madoff’s fraud.
There are many notable aspects to the Fairfield liquidations. The principal area in which there have been developments in the last 12 months is in the context of an application under Section 273 of the Act made by a group of investors seeking to restrain the liquidators from pursing claims in the United States Bankruptcy Court for the Southern District of New York designed to clawback pre-liquidation redemption payments from investors who redeemed out of the funds before Madoff’s fraud was discovered (the US Proceedings).
The liquidators began their BVI clawback litigation in 2009, with the majority of the claims being issued by Fairfield Sentry (Sentry). Preliminary issues were quickly identified, in an attempt by redeeming investors to minimise the time and expense of a full trial against every redeemer. The preliminary issues are commonly referred to as the ‘Article 11 defence’ and the ‘Good Consideration defence’. The first turns on a provision in Sentry’s articles of association to the effect that a certificate as to the NAV per share or as to the subscription price or redemption price given by the directors in good faith ‘shall be binding on all parties’. This provision, submitted by the redeemers, meant that the NAV could not be altered when the Madoff fraud came to light. The second, Good Consideration, was a defence to Sentry’s unjust enrichment claim, on the basis that the redemption proceeds were owed to the redeemers under a valid contractual obligation, so that a payment made under an alleged mistake (here, as to the funds’ NAV) could not be recovered unless the mistake was such as to avoid the entire contract. The two defences had been considered separately in the courts below, where both at first instance and on appeal the courts found in favour of Sentry on Article 11, and in favour of the redeemers on Good Consideration.
The Privy Council took the view that the two issues were inextricably linked and had to be considered together, ultimately finding for the redeemers on all issues. This victory for the redeemers should now be the end of the clawback claims in the BVI. The effect of the decision on the more than US$6 billion claimed from redeemers in the US Proceedings has yet to be fully determined and was the subject of the most recent round of BVI litigation.
The US Proceedings had been stayed pending the outcome of the BVI proceedings. Following the Privy Council’s decision, a group of redeemers (US Redeemers) applied to the BVI court seeking to prevent the continuation of the US Proceedings, and sought the following relief: that any permission given to the liquidators to pursue the US proceedings should be discharged and reversed; and injunctions restraining the liquidators from pursuing the US Proceedings. The application was brought under Section 273 of the Act, which provides: ‘A person aggrieved by an act, omission or decision of an office holder may apply to the Court and the Court may confirm, reverse or modify the act, omission or decision of the office holder.’
The application was dismissed on a number of grounds, including that: though the US Redeemers were defendants in the US Proceedings this did not give them the requisite legitimate interest upon which the court could act to grant the relief sought; under the relevant high-threshold test, the US Redeemers had failed to show that the liquidators’ actions were unreasonable or outside the bounds of their discretion; and the US Redeemers had alternative recourse before the US courts. The judgment on the application provides a useful exposition of the BVI court’s supervisory jurisdiction over the conduct of BVI liquidators, in particular highlighting the limited circumstances where the court should be willing to substitute its judgment for that of its office holders. An appeal of this decision has been heard by the Eastern Caribbean Court of Appeal, and judgment is awaited with interest.
ii Procedure for recognition of foreign representatives
On appeal, it was decided that a foreign trustee in bankruptcy seeking recognition need not have served the bankrupt with the recognition application. Although the relevant procedural rules were silent on the point, the proper approach in seeking to determine any requirements was to look to the purpose of the recognition application, which in the circumstances was to assist a foreign court and, therefore, did not require service upon the bankrupt individual.
IV ANCILLARY INSOLVENCY PROCEEDINGS
Ancillary insolvency proceedings in the BVI for foreign-registered companies are relatively unusual. The principal reason for this is that foreign-registered companies will rarely have assets or directors in the BVI. If they do, those assets are likely to be in the form of shares in BVI companies, and the assets of those companies themselves will almost invariably be outside the BVI and there may very well be a formal insolvency of the BVI company in the structure in any event.
As described in Section I.vii, the Act provides scope for the BVI court to provide assistance to appointees in foreign insolvency proceedings from certain designated countries, and recent authority has demonstrated that the common law route to recognition of foreign insolvency proceedings remains for those designated countries. This recent decision is likely to increase the number of applications for assistance and recognition from insolvency representatives in those countries. As part of its ongoing review of the Act, it is thought likely that the BVI government will consider whether the list of designated countries to which assistance can be given in insolvency proceedings should be expanded.
The forthcoming 12 months may bring interesting developments in BVI insolvency law. The government continues to review the Act particularly in the evolving area of cross-border insolvency, and the practical impact of the adoption of the Judicial Network guidelines will become clearer as are they are implemented in live matters.