Introduction
The Court of Appeal of the Eastern Caribbean Supreme Court on
Monday, 11 March handed down an important ruling on the question of
where investors stand in the "waterfall" of distributions
in the liquidation of investment funds under British Virgin Islands
law. It affirms the widely held industry view that debts owed to
past members for redemption proceeds provide them with deferred
creditor status and thus they rank behind external creditors of the
company, but their claims have priority over the interests of
existing members in the liquidation of a BVI company.
The decision brings certainty to the position and will be welcomed
by investors, particularly those with secondary market positions,
as well as by insolvency practitioners who may now proceed to make
distributions with clarity.
Case summary
Whilst the conventional practice in insolvency law is that
creditors always come before members, and that as between
themselves members rank pari passu according to their
shareholdings, the generality of these two maxims had been called
into question following the first instance decision of the BVI
Commercial Court in November 2012. At first instance it was held
that an investor who had redeemed his shares in the fund and was
owed redemption payments would rank alongside investors who had not
redeemed their positions and who were still members.
Section 197 of the Insolvency Act 2003 provided only for an
"adjustment" to be made between past members and members,
but without particularising how this adjustment should be made. At
first instance, the Commercial Court considered that this provision
did not specifically provide that continuing members should be
subordinated to past members, and was reluctant to create an
intermediary class of claims not expressly contemplated by the
legislation, even where, as is customary, the memorandum and
articles of association of the fund clearly described redeemed
members as creditors and that their debts were liabilities owed to
them by the company. Instead, it was held that former members
ranked pari passu with continuing members. Their respective
rights to share in the surplus were valued by reference to the NAV
at the time of redemption (in the case of redeemed members) or
their initial subscription price (in the case of continuing
members).
The Court of Appeal however found that the "adjustment"
provisions of section 197 did provide for "inside"
creditors such as former members of the fund to be given priority
of distribution against the members, after the payment of external
creditors but before distribution of the residual surplus. In
addition, it was held that the application of the subscription
price as a means for determining the rights of continuing members
to share in any residual surplus was flawed as a matter of British
Virgin Islands law. Instead, the relevant provisions of the
memorandum and articles of association or, in the absence of
specific provisions, the default position in section 34 of the BVI
Business Companies Act, should be applied in determining rights of
members and past members to participate in the distribution of
surplus assets of the fund.
What now?
A number of liquidators are believed to have been waiting for
this judgment before making any distributions to ensure that there
was a clearly defined route forward. This judgment therefore
provides welcome clarity for investors in BVI funds and liquidators
of BVI funds by laying down a clear priority of distributions for
vehicles in liquidation. It also realigns British Virgin Islands
insolvency law with the orthodox position found in most other fund
domiciles.
Harneys acted for the successful appellants, a consortium of
investment funds.
The full judgment of Somers Dublin Ltd. A/C KBCS and others v
Monarch Pointe Fund Limited (In Liquidation) can be read here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
