The recent Eastern Caribbean Court of Appeal decision in Trade and Commerce Bank v. Island Point Properties S.A. has important implications for insolvency law within the British Virgin Islands, as well as for other jurisdictions which share a similar statutory framework to the BVI's Insolvency Act 2003 (the "Act").
The Appellant, Trade and Commerce Bank ("TCB"), served a statutory demand upon the registered agent of the First Respondent, Island Point Properties S.A. ("Island Point"). Island Point failed to make an application to set aside the statutory demand within the prescribed time. The debt went unpaid, resulting in TCB's application to liquidate Island Point based on section 162(1)(a) of the Act (insolvency).
At first instance Island Point did not appear, due to the previous decision of the BVI High Court in Metalloyd Ltd. v. Burwill Resources which stood for the proposition that a company, which failed to set aside a statutory demand within the time frame permitted by the Act, could not then dispute the debt at the application to wind up the company. Instead, Jacob Ungar, the sole beneficial owner of Island Point, filed a Notice of Appearance and was heard de bene esse by the Judge.
The Judge dismissed the Application to wind up Island Point on the basis that TCB's statutory demand disclosed no viable cause of action, whether in debt or at all.
On appeal TCB's main argument was that once a statutory demand had not been set aside and the legal conclusion of "insolvency" under section 8 of the Act arose, then the application to wind up was a "done deal", i.e. the Court had no residual discretion to examine the statutory demand even if it was bad, as otherwise the legal conclusion of "insolvency" mandated by the Act would be pointless. The BVI Act differs from some regulatory frameworks in that a failure to set aside a statutory demand gives rise to an automatic conclusion of insolvency under section 8 of the Act, rather than a mere presumption of insolvency as under, for example, the UK Insolvency Act 1986.
The Court of Appeal dismissed TCB's appeal. Their most important finding was that the decision in Metalloyd did not mean that a company's failure to challenge a statutory demand deprived the court of its inherent jurisdiction to review a statutory demand. This would render otiose the clear discretion of the court under section 167 of the Act. The Court of Appeal also added a "gloss" to Metalloyd, making it clear that where a company had been unsuccessful in setting a statutory demand, having made an application to do so, the company could not seek to resist the application to appoint liquidators on the same grounds on which it relied for setting aside the demand, unless there were "good and substantial reasons" to do so. The addition of the "good and substantial reasons" test acts as a safety valve which prevents the company from being shut out without exception.
Secondly, it was common ground that TCB had brought an equitable restitutionary claim against Island Point. The Court of Appeal held that a restitutionary claim of this kind was not a "debt" which was "due and payable" within the meaning of section 155 of the Act. This was based on section 10 of the Act, which sets out a number of categories which amount to a "liability", one of which is a "debt". The Court of Appeal made it clear that whilst a "debt" is a "liability", the converse is not true and not all "liabilities" are "debts". In order to be a debt the obligation had to arise "out of a contractual relationship, or under some statutory provision or out of circumstances giving rise to an obligation to repay on the basis of money had and received".
Finally, the Court of Appeal confirmed that the Judge was wrong to conclude that Mr. Ungar had no standing as a member to be heard on the originating application. This was counter to the well-established right of a member to be heard on an application to wind up a company and there was nothing in the Act which circumscribed that right. It expressly noted that the weight to be given to a member's view was a separate matter, which the Court did not need to address for these purposes.
The decision is a welcome one and is a sensible and practical interpretation of the Act. Had the Appellant's contentions been upheld, a healthy and profitable company which was actively engaged in business could find itself being killed off on a wholly spurious basis and deprived of the ability to defend itself from attack merely because, sometimes through no fault of its own, it had missed the deadline for setting aside a bad statutory demand. The decision carefully balances, on the one hand, the need for a straightforward and speedy statutory demand procedure against, on the other, the need to prevent abuse of that procedure, especially in an offshore jurisdiction where often, the only presence of a company is its registered agent and registered address and where the short 14 day time limit could result in substantial injustice.
The development of Metalloyd is equally welcome, introducing the "gloss" that a company can make arguments at the application to appoint liquidators if there are "good and substantial" reasons to allow it to do so. This prevents a company from having a second bite at the cherry and unduly increasing costs for those seeking to wind it up, whilst preserving the option for the court to hear the company's arguments in the rare circumstances where to shut out the company could cause substantial injustice.
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