ARTICLE
4 August 2004

Harneys Corporate Recovery Services Guides to The Insolvency Act 2003 - Part 2

The Insolvency Act 2003 is the BVI’s all-encompasses insolvency law that deals with both companies and individuals, although none these guides will deal with bankruptcy and issues relating to individuals. As its name suggests, the Act only deals with regimes for insolvencies such as the liquidation of insolvent companies, and regimes for solvent companies are outside its scope. Thus, voluntary liquidations of solvent companies continue to be governed by the Companies Act.
British Virgin Islands Wealth Management

GUIDE 3: ADMINISTRATION

3.1 Introduction

Administration is a brand new insolvency regime that Part III of the Insolvency Act will introduce into BVI corporate insolvency law when it is brought into force, and its aim is primarily to provide a corporate rescue mechanism for ailing companies. Its key feature is a Court order (an Administration Order) which restricts the rights of creditors to enforce security or take action against the company or its property while it is in force. During that period, the company’s business and affairs are managed by a Court appointed Administrator who is under a duty to present proposals to creditors for the future of the company. As quid pro quo for this restriction on creditors’ rights, an Administration Order can be blocked by the holder of a floating charge appointing a qualifying Administrative Receiver.

Administration is modelled on the administration provisions in the UK Insolvency Act 1986 (before those provisions were heavily amended by the Enterprise Act 2002) but with significant differences: the BVI legislation is even more secured-creditor friendly than the UK Act pre-amendment. Experience in the UK has shown that the floating chargee’s ability to block Administration has emasculated its impact as a corporate rescue tool and it has featured in relatively few (albeit high-profile) insolvencies. Our view is that this is good for banks or anyone with a floating charge.

3.1 When Part III comes into force

Administration Orders will not be available to companies until Part III comes into force which, it is believed, will not happen until after legislation for Special Purpose Vehicles (see below) has been enacted.

3.2 Administration Orders not available for all companies

Administration Orders cannot be made in respect of foreign companies98. We believe that they will not be available for BVI companies that are registered as mutual funds, nor for particular types of companies called Special Purpose Vehicles (which will be governed by specific legislation that has not yet been enacted but is expected this year).

3.3 Persons who can apply for an Administration Order

The company or its board of directors can apply for an Administration Order99. English case law suggests that all the directors acting informally may resolve to make such an application even where there is no provision in the company’s Memorandum and Articles of Association authorising them to do so100. Further, once a proper board resolution has been passed, it becomes the duty of all the directors to implement it including those who abstained from taking part in the decision or indeed those who voted against it101.

A creditor can also apply for an Administration Order102, as can the supervisor of a creditors’ arrangement103, the Financial Services Commission104 (but only in respect of a company that is a regulated person i.e. it holds a financial services licence, or a company that is carrying on unlicensed financial services business), and a liquidator105 of the company if it is in liquidation.

The application can be made by any one or more of the above persons.

3.4 Circumstances when the Court can make an Administration Order

There are essentially two main conditions that have to be satisfied before the Court, in the exercise of its discretion, can make an Administration Order.

First, the Court must be satisfied that the company is or is likely to become insolvent106. Thus, it would have to be shown that the company has not complied with a statutory demand that has not been set aside, or that execution on a judgment has been returned wholly or partly unsatisfied, or, most importantly, that it is balance sheet insolvent (i.e. its liabilities exceed its assets) or unable to pay its debts as they fall due107.

Second, the Court has to be satisfied that there is a reasonable prospect that an Administration Order "will" achieve one or more of the statutory purposes specified in section 76(1). These statutory purposes lie at the heart of Administration Orders and they are discussed in more detail below.

It is important to note the standard of proof that the Court has to be satisfied of i.e. a reasonable prospect that the statutory purpose(s) "will" be achieved by an Administration Order. This is in contrast to the equivalent UK provisions where the Court had to be satisfied that there was a reasonable prospect that an order was "likely to"108 achieve the statutory purpose(s), which has been interpreted to mean "a real prospect" and the English Courts have rejected the more stringent test of balance of probabilities109. However, it remains to be seen how the BVI provision is interpreted because the word "will" is clearly intended to import a higher standard of proof and require greater cogency of evidence on the achievement of the statutory purpose(s).

If the conditions are satisfied, the Court has a discretion to make an Administration Order – it is not obliged to do so110. The Court would balance the interest of those seeking an Administration Order against the interests of the company, its shareholders and management who may not want the business taken away from them111.

The Order must be for a specified period. In England, the Courts have generally favoured an initial period of 3 months.

3.5 The statutory purposes for which an Administration Order can be made

An Administration Order will only be made in order to achieve one or more of the statutory purposes set out in section 76(1), most of which are aimed at corporate rescue. Those purposes are:

(a) the rehabilitation of the company or of one or more companies in a group of companies of which the company is a member;

(b) the survival of all or any part of the company’s undertaking as a going concern;

(c) the better return for the company’s creditors than would result from an immediate liquidation;

(d) the approval of a creditors’ arrangement under Part II of the Act; and

(e) to facilitate an application in aid of foreign proceedings.

The last purpose, i.e. to aid foreign proceedings, is potentially a very useful innovation in the legislation particularly where a BVI company is subject to insolvency proceedings in other jurisdictions. For example, an Administration Order could be applied for in order to aid a foreign liquidation, or to aid Chapter 11 proceedings to which a BVI company may be subject in the USA, in order to coordinate and harmonise the different insolvency proceedings.

Depending on the circumstances, the first three purposes may overlap but there are important differences e.g. the sale of a company’s business as a going concern will fall within the second statutory purpose (and possibly also the third) but not the first, which contemplates the rehabilitation of the company.

Administration Orders cannot be made to achieve a purpose that is not specified in section 76(1). Thus, an Administration Order cannot be made in order to make a distribution to members (although an Order can be made in order to approve a creditors’ arrangement that may involve such a distribution to members)112.

There are situations when the Court is obliged not to make such an Administration Order and these are quite apart from the situations where the Court, in the exercise of its discretion, concludes that an Administration Order is not appropriate in all the circumstances.

3.6 Blocking an Administration Order by appointing a qualifying administrative receiver

The most important situation when a Court must not make an Administration Order is when "a qualifying administrative receiver" has been appointed by the holder of a floating charge. This provision is fundamental to the whole scheme and gives primacy to the rights of secured creditors by allowing them to block the appointment of an Administrator.

A "qualifying administrative receiver" is an insolvency practitioner appointed as an administrative receiver and notice of whose appointment is filed with the Registrar no later than the day before the date of the hearing of the Administration Order application113. If these conditions are met, then the Court must dismiss the application for an Administration Order114. It does not matter whether the administrative receiver was appointed before or after the application for an Administration Order was filed or served.

A "lightweight" floating charge e.g. one that encompasses no assets at the time it was created115, should be sufficient to allow the charge holder to appoint an administrative receiver and block Administration.

These provisions give primacy to the rights of a secured creditor with a floating charge – typically a bank – and, if the UK experience is anything to go by, they will almost invariably block an Administration Order in order to ensure that their security is enforced for the discharge of their debts, and to retain control of the insolvency process through the appointment of administrative receivers.

The only situations when a Court can make an Administration Order even though an administrative receiver has been appointed are where the person entitled to appoint the administrative receiver consents116, or the Court is satisfied that any floating charge that would allow the person to appoint an administrative receiver is vulnerable and liable to be set aside under Part VIII of the Act as a voidable transaction117.

No Administration Order will be made if the company is in liquidation118 (unless it is the liquidator of the company who is applying for an Administration Order).

3.7 The Moratorium

From the moment that an application for an Administration Order is filed, a statutory moratorium comes into effect that restricts the rights of secured and unsecured creditors, as well as those of members, and it is this aspect that is intended to provide an ailing company with breathing space while rescue attempts are made. Its aim is to lessen the pressure from creditors by restricting their right of enforcement.

The moratorium commences on the filing of the application (not on the making of an order) and terminates either when the application is dismissed or, if an Administration Order is made, when that Order is discharged119.

Thus, no steps can be taken to enforce security120 or to repossess assets that are used by the company or are in its possession121, and no proceedings or other legal process may be commenced or continued against the company or its assets122, except with the leave of the Court or, if the company goes into Administration, then with the consent of the Administrator. If proceedings are commenced without leave or consent, they are not a nullity: they are simply adjourned while leave is sought123.

Other restrictions are that no shares may be transferred or alterations made to the status of a member124, no members’ resolution may be passed125, and no order for the appointment of a liquidator may be made when the moratorium is in force126.

Further, during the period from the commencement of the moratorium (i.e. when the application is presented) until either an Administration Order is made or the application is dismissed, further restrictions apply to the company. It cannot dispose of any charged assets127 (or any assets subject to a floating charge128 or a retention of title clause129 otherwise than in the ordinary course of business130), or any assets that it uses or occupies but which are owned by someone else131. An exception applies for perishable goods, but the company must apply to the Court for permission to dispose of them132.

The moratorium does not affect the substantive rights of the parties but is merely concerned with procedure in that it imposes a restriction on the enforcement of creditors’ rights; it does not destroy those rights133.

3.8 Exceptions to the Moratorium

There are a number of important statutory exceptions to the moratorium that require careful consideration. For example, and most importantly in practice, until an

Administration Order is made, the moratorium does not prevent the appointment of an administrative receiver134. The moratorium does not prevent the filing of an application for the appointment of a liquidator135, or the appointment of a liquidator136 (or provisional liquidator137) on the grounds of public interest. Further, if in the enforcement of a charge138 or the repossession of assets139 a person had assumed control of them before the commencement of the moratorium period then the restrictions do not apply and the leave of the Court is not needed.

The restriction against proceedings or other legal process would not cover the taking of non-judicial steps or the taking of steps that do not require the Court’s assistance140. For example, the service of a notice terminating a contract, or making time of the essence in a contract, are not prevented by moratorium and therefore do not require the consent of the Court or the Administrator141.

The moratorium does not prevent a creditor exercising insolvency set-off under section 150142, and the provisions relating to netting of market contracts are exempt from the moratorium143.

3.9 Seeking leave or consent

In order to do the things that are otherwise restricted by the moratorium, a person needs the leave of the Court or, where the company is in Administration, the consent of the Administrator. (Note this difference with the UK legislation under which a person can obtain consent from the Administrator or the Court even after the company goes into Administration; the BVI legislation provides that it is the consent of the Administrator that is necessary after the company goes into Administration). However, despite the way in which this provision is drafted, it is our view that the Court can exercise jurisdiction over the Administrator to give directions in such situations because he is an officer of the Court appointed pursuant to a Court Order.

There are a number of English cases giving guidance for the granting of leave by the Court144 after an Administration Order has been made, and they give the following, non exhaustive, guidance: the Court should balance the interests of the company and the creditors in all the circumstances of the case; great weight would normally be given to the rights of secured creditors or to persons with a proprietary interest and Administration should not normally be at the expense of such persons save to the extent that it is unavoidable and even then only to the extent strictly necessary; if the granting of leave would not frustrate the purposes of the Administration then it should normally be given; the loss caused to a creditor by refusing leave should be balanced with the loss caused to others if leave is given.

The decisions emphasise that where an Administrator is approached for his consent, he should consider all the circumstances including the above considerations, and if he refuses leave he should state why unless it is obvious. The BVI legislation is different because there is no provision for seeking leave of the Court when the company is in Administration. The considerations that apply before an Administration Order is made would be different from those afterwards, and it remains to be seen whether the English cases will be followed in the BVI.

3.10 The duties and powers of an Administrator

The Administrator, who is an officer of the Court and acts as agent of the company, has two main duties:

(1) He has to prepare a report setting out his proposals for achieving the statutory purpose(s) for which the Administration Order was made145, and call a meeting of creditors to consider the proposals146. The meeting of creditors must be held within 60 days of the Administration Order147, and the report must be sent to the creditors148 and members149, and filed with the Registrar150. The report must contain the matters specified by the Insolvency Rules.

(2) He must take custody or control of the assets of the company151, and manage the business, assets and affairs of the company in furtherance of the statutory purpose, in accordance with any proposals after they have been approved, and in accordance with any directions given by the Court152.

He also has certain ancillary, reporting duties i.e. he has to prepare a report within 60 days stating whether in his opinion further inquiries should be made relating to the promotion, formation or insolvency of the company or the conduct of its business153. He must also report to the Financial Services Commission if it appears to him that the company carried on unlicensed financial services business154.

As part of his duty to manage the business, an Administrator may (depending upon the statutory purpose for which he was appointed) owe a duty to the company to take reasonable steps to obtain the best price for its assets as well as a duty to take reasonable care in choosing the time at which to sell such assets155. This may be contrasted with the position of receivers or administrative receivers, whose duty on the sale of charged property extends to obtaining the best price obtainable at the time of the sale but not to the timing of such sale156. Also, they are under no duty to carry on the business of the company (although if they do so, they must take reasonable steps to run it profitably)157, or to effect improvements in the secured property158.

The Administrator also has extensive powers which are set out in Section 90(1) and in Schedule 1 of the Act, and they include the power to remove directors, the power to do anything necessary for the management of the business, assets and affairs of the company, and the power to apply to Court for directions.

The Administrator can dispose of assets that are subject to a floating charge, and the floating chargee acquires the same priority in respect of the assets representing the disposed assets as he would have had over the disposed assets159. Further, the Court can authorise the Administrator to dispose of assets that are subject to other security interest that is not a floating charge, or assets which the company is not the owner but which it uses or has possession of, if the Court considers that this would promote the purposes of the Administration160.

However, there are restrictions on the Administrator’s exercise of his powers. He can only exercise them for the statutory purpose(s) for which he was appointed – he cannot exercise them for any other purpose including a statutory purpose for which he was not appointed. Thus, he cannot retain goods in order to put pressure on the owner of the goods or in improving his bargaining position to vary the substantive rights of creditors161. Also, as an agent of the company, he has no greater power than the company i.e. he has no greater powers than the company’s Memorandum and Articles of Association. Thus, he cannot carry on a business that is not within the objects clause of the Memorandum162 (although IBCs ordinarily have unrestricted objects). Unlike an administrative receiver, he is not appointed for the benefit of one creditor but in order to manage the company in furtherance of the statutory purposes.

3.11 Voidable transactions in Administration

The Act provides that those transactions that were vulnerable in liquidation as voidable transactions would similarly be vulnerable in Administration163. Thus, transactions that are unfair preferences, undervalue transactions, voidable floating charges and extortionate credit transactions can also be set aside on the application of the Administrator.

3.12 The effect of an Administration on directors

The making of an Administration Order does not terminate the appointment of directors or their powers and duties. Indeed, the legislation specifically provides that the directors remain in office and their powers, function and duties continue whilst the company is in administration, except to the extent that such powers etc are inconsistent with the powers, function and duties of the Administrator or the extent that the Administrator otherwise directs in writing164.

Given that the directors will generally be more familiar with the business than the Administrator, and the fact that most IBCs carry on business outside the BVI but the Court appointed Administrator has to be a BVI resident insolvency practitioner, it is likely that Administrators will allow directors to continue to exercise most of their powers and duties especially those relating to the day to day running of the company and its business. However, an Administrator should always give careful consideration to which of the powers of the directors he should restrict in writing in order to further the purposes of the Administration. Given his duty of managing the company, it would be unwise for him to let the directors exercise their powers carte blanche and unrestricted.

3.13 Liabilities of an Administrator

The legislation imposes a number of criminal penalties on the Administrator for failure to comply with his statutory duties. For example, he commits an offence if he fails to prepare a report of his proposals, or call a meeting of creditors to consider them, or send them to creditors and members, or file them with the Registrar. He also commits an offence if he fails to keep accounting records recording and explaining receipts, expenditure and other transactions for the period the company is in administration.

The Administrator may become personally liable in tort (e.g. negligence or conversion), or under contracts entered into by him, arising out his conduct as Administrator during the period of his appointment as Administrator.

However, an Administrator can apply for a release after he ceases to be an Administrator, and if granted, he is discharged from all liability in respect of any act or default relating to the Administration165. But the Court can revoke such a release e.g. where it was obtained by fraud or concealment of material facts166. In any event, if the Court is satisfied that a former Administrator has misapplied or retained company money or assets, or been guilty of misfeasance or breach of fiduciary duty to the company, then notwithstanding the release, it may order the Administrator to compensate the company or restore the money167.

3.14 The role of creditors

The primary role of creditors in Administration is to consider the proposals put forward by the Administrator at a creditors’ meeting. They may approve the proposals or reject them. If they reject them, the Court has the power to discharge the Administration Order and make such consequential provisions as it considers fit (e.g. it may appoint a liquidator).

If the creditors wish to amend the proposals, then in general either the Administrator needs to consent to the amended proposals in writing, or the meeting has to be adjourned in order to allow creditors not present or represented to attend the adjourned meeting where the amended proposals are considered.

If the Administrator wishes to modify proposals that have been accepted by creditors, he must set them out in a report and call a meeting of creditors to consider them. However, in exceptional circumstances (e.g. where there is considerable urgency such that it is not practicably possible to call a creditors’ meeting), the Court may authorise the Administrator to modify the proposals as part of the Court’s general jurisdiction to give directions to the Administrator on his application under section 90(1)(f)168.

3.15 The protection of creditors and members

In the period between the filing of an application for Administration and the making of an Administration Order, creditors and members may apply to Court for directions relating to the moratorium, and the Court has a very wide discretion on the type of directions it can make including directions for the management of the business169.

After the making of an Administration Order, members and creditors can apply to Court on the grounds of unfair prejudice under Section 114 i.e. that the company’s business, affairs and assets have been managed by the Administrator in a manner unfairly prejudicial to their interests, or that the Administrator’s actual or proposed actions are or would be so prejudicial. The Court has a wide discretion on the orders it can make if such unfair prejudice is found including discharging the Administration Order itself170. Thus, if proposals put forward by an Administrator and approved by creditors are seriously unfairly prejudicial to other creditors, such that an Administration Order would not have been made on the proposals, then the disadvantaged creditors may successfully be able to apply for the discharge of the Administration Order itself171.

Members and creditors remedies are not limited to the statutory rights under section 114, and they may, depending upon the circumstances, have causes of actions personally against the Administrator.

3.16 Discharge of an Administrator

The power to apply for a discharge of the Administration Order is given to the Administrator172 who must apply to discharge if he considers that the purposes of the Administration have either been achieved, or are incapable of achievement173. He must also apply if he is required to do so by a meeting of creditors174. If creditors and members can show unfair prejudice by the Administrator, then one of the remedies the Court can give is the discharge of the Administration Order175. If the Court discharges the Administration order and it is satisfied that the company is insolvent, it can appoint a liquidator of the company176, or even dissolve it if no useful purpose would be served by appointing a liquidator177.

GUIDE 4: ADMINISTRATIVE RECEIVERSHIP

4.1 Introduction

Part IV of the Insolvency Act introduces a new insolvency regime into BVI law called Administrative Receivership that is primarily for the benefit of secured creditors holding a floating charge. The BVI regime is based on the administrative receivership provisions of Part III UK Insolvency Act 1986 before they were fundamentally changed by the Enterprise Act 2002, and the essence of it is to allow the holder of a floating charge to appoint a person – an Administrative Receiver – over the whole of the company’s business and assets in order to realise them for the benefit of that secured creditor. The new BVI law is secured-creditor friendly: the Administrative Receiver will enjoy very wide powers in the enforcement of the security, and the charge holder has the ability to block the appointment of an Administrator. The legislation also brings certainty to certain issues that are unclear under English law (e.g. whether more than one Administrative Receiver can be appointed – see below).

Part IV of the Act in fact deals with receiverships in general but this guide will only focus on Administrative Receivership which, it is believed, will probably be the most important insolvency regime to affect BVI companies in practice.

4.2 Purpose and scope of Administrative Receivership

Administrative Receivership, like its UK counterpart, is primarily an enforcement procedure for the holder of a floating charge to realise the assets under his security. Although included in the Insolvency Act, Administrative Receivership is not a collective insolvency procedure in the way that liquidation or administration are, as it is not a procedure for the benefit of the general body of creditors or even the company. That does not mean that the Administrative Receiver can disregard the interests of the company or the unsecured creditors: the Act provides specific instances when he owes a duty to them, and he is required to notify the company and the creditors of his report, and also to call a meeting of creditors. However, these are ancillary to his primary duty to ensure that the secured debt is repaid178.

Administrative Receivership can exist concurrently with Liquidation – Liquidation does not affect a secured creditor’s ability to enforce his security179 - as well as Creditors’ Arrangement180, although in practice it will be the Administrative Receiver who will be running the show. However, Administration cannot co-exist with Administrative Receivership because the Act specifically allows the holder of a floating charge to block the appointment of an Administrator and, conversely, if an Administrator is validly appointed under the legislation, then an Administrative Receiver who is in office is deemed to have vacated office181. Administrative Receivers can be appointed over foreign companies.

4.3 The floating charge

In order to bring about administrative receivership, a secured creditor needs to be the holder of a debenture or other instrument of the company secured by a floating charge that allows him to appoint a receiver over the whole, or substantially the whole, of the business, undertaking and assets of a company182. The charge can be coupled with other security interests such as a fixed charge, but the key requirement is that the creditor has a charge which, as created, is or was a floating charge183 (even if it had later crystallised into a fixed charge). There is considerable case law on what amounts to a floating charge but that is beyond the scope of this guide.

A creditor who wishes to take advantage of Administrative Receivership is well advised to ensure that his charge, as created, was one that would be a valid floating charge under BVI law. The key is validity under BVI law, otherwise the holder of the security will not be able to appoint an Administrative Receiver or take advantage of that procedure (although he may have a perfectly valid security that may entitle him to appoint an ordinary receiver), and he will not be able to block an Administration Order.

Creditors should also note that an Administrative Receiver must be appointed over "the whole, or substantially the whole" of the business, undertaking and assets of the company, otherwise he will not be treated as an Administrative Receiver. The scope of his appointment is a matter of contract between the company and the secured creditor and care should be taken to ensure that a debenture that entitles the creditor to appoint a receiver does conform with this provision.

4.4 Appointment of an Administrative Receiver

Before an Administrative Receiver can be appointed, the conditions for his appointment must have arisen; they will simply be a matter of contract between the secured creditor and the company. The condition that is commonly found in practice is that an outstanding debt remains unpaid after demand for repayment has been made. Once the conditions for appointment have arisen, the procedure for appointment provided for by the Act is quick and cheap. There is no need to apply to Court. Instead, a creditor simply sends a notice in writing to the prospective administrative receiver appointing him, and he is given until the end of the following business day to accept184. If he accepts – and his acceptance need not be in writing – the appointment dates from when he received notice of the appointment185. If he does not accept within the required time limit i.e. by the end of the next business day, any purported appointment is not effective186. The Administrative Receiver must confirm his acceptance in writing within 7 days187 if his acceptance was not in writing, send a notice of his appointment to the company188, file the notice with the Registrar (and the FSC if the company was a regulated person i.e. the holder of a prescribed financial licence)189, advertise his appointment within 5 business days190, and send the notice to all creditors of the company within 28 days191.

4.5 Issues relating to the appointment of Administrative Receivers

There are a number of features of the Insolvency Act that secured creditors and insolvency practitioners will find helpful because it clarifies a number of uncertainties thrown up by the UK Insolvency Act on which it is based, and will ensure certainty in BVI law.

One such issue is whether there can be more than one Administrative Receiver for the company. This is not the same as whether there can be joint Administrative Receivers i.e. where one floating charge holder appoints two or more persons to act as joint receivers of the company by virtue of his powers under the debenture. Both the BVI and the UK Acts expressly permit the latter192. Rather, the issue is whether two or more floating chargees can appoint their own administrative receivers concurrently, each one acting for the benefit of his secured creditor. The UK Act did not deal with the point although the more commonly accepted view is that such appointments cannot be made193 not least because the appointment of one over "the whole or substantially the whole" of the property of the company probably excludes the appointment of another over such property, and, from an insolvency point of view, multiple appointments could result in multiple sets of costs, creditors’ meetings, investigations and returns etc, all of which would be repetitive and wasteful and ultimately hamper the secured creditors.

The BVI legislation solves the problem neatly by providing that each floating charge holder may appoint an Administrative Receiver, but only one may act in relation to the company at any time194. The Administrative Receiver who acts will be the one appointed by the person whose security ranks highest in priority195. In that way, each secured creditor’s right to appoint is protected but as between them control is given to the one having highest priority as only his Administrative Receiver can act in relation to the company; this avoids multiple and wasteful filings and meetings etc.

Another issue is whether the Court can appoint an Administrative Receiver i.e. a receiver who enjoys the same status and powers. The UK Insolvency Act is silent on the point, but there are suggestions in the case law that the English Courts do not have such powers196. The BVI Insolvency Act expressly gives the BVI Court the power to appoint an Administrative Receiver in circumstances where, if that person had been appointed out of Court, he would have been an Administrative Receiver197. A Court appointed Administrative Receiver would enjoy the same powers as one appointed out of Court save to the extent specified in the Court order198. However, the Court cannot appoint an Administrative Receiver if one is already acting in relation to the company199.

4.6 Who can and cannot act as an Administrative Receiver

Only a licensed insolvency practitioner can act as an Administrative Receiver200, which means that he must be an individual resident in the BVI who holds a licence issued by the Financial Services Commission under Part XX of the Insolvency Act201. An individual who is not resident in the BVI cannot act as an Administrative Receiver unless he does so jointly with a BVI resident licensed insolvency practitioner202, and only if he is an "overseas insolvency practitioner" i.e. an individual who has sufficient qualification and experience to act as an Administrative Receiver and who fulfils other conditions in section 483 of the Act e.g. there is sufficient security for the performance of his duties. A body corporate203 cannot act as an Administrative Receiver, and there is also a long list of certain other persons (including individuals) who are also ineligible. They are: the mortgagee of the company’s assets204; a person who is or within the 2 years has been an officer or employee of such a mortgagee205; a person who is or within the 2 years has been a shareholder or member of the company or a related company206; an insolvency practitioner who is disqualified from acting because he is bankrupt or has a Disqualification Order against him under section 260(4) of the Act207; a person who at anytime in the previous 3 years has been an auditor of the company or employee of such an auditor, or director of the company208; the Official Receiver209; and such other persons as may be prescribed210.

4.7 Status and powers of an Administrative Receiver

An Administrative Receiver is deemed by the Insolvency Act to be the agent of the company in receivership (but if a liquidator is appointed in respect of such a company then the agency terminates211). This provision puts on statutory footing a long established practice found in most well drafted debentures of making a receiver the agent of the company rather than of the debenture holder. The purpose of such an agency is, of course, to shield the debenture holder and the Administrative Receiver from any liability arising from the activities (or omissions) of the latter and the agency is effective in practice in achieving this. Thus, a receiver who decides not to perform a pre-receivership contract entered into by the company (because the performance of it would adversely affect the realisation of assets on behalf of the debenture-holder, is not himself liable for breach of contract (because he is the agent of the company)212, and the debenture holder is also not liable. However, the BVI legislation imposes certain duties on the Administrative Receiver when he exercises his powers, and those are considered below. The agency is not an ordinary agency in that it is really a legitimate device for protecting the debenture holder and the Administrative Receiver’s powers will in practice be exercised for the benefit of the secured creditor on whose behalf he is appointed213. To that end, he can exercise the very extensive list of powers set out in Schedule 1 in relation to the company’s assets over which he is appointed save to the extent that the debenture or the instrument by which he is appointed sets out otherwise214. They include the power to carry on the business of the company, power to take possession or sell such assets, power to commence proceedings on behalf of the company, and a catch all provision allowing him to do all things incidental to the exercise of the powers in Schedule 1215. He can even apply to the Court to dispose of assets which are subject to a security interest that has priority over any security interest of the debenture holder by whom he was appointed216 if it would be likely to promote a more advantageous realisation of the company’s assets. The senior creditor is, however, protected in that the net proceeds of sale have to be applied towards his security interest.

The company and its officers must provide the Administrative Receiver with all the books and information relating to the assets over which the receiver is appointed, and they must give him such assistance as he reasonably requires217. He must also require persons from a certain class (e.g. the officers, employees or promoter of the company) to prepare a statement of affairs218.

4.8 Duties & liabilities of an Administrative Receiver

The primary duty of an Administrative Receiver is to ensure that the secured debt is repaid and to account for any surplus remaining after realising the assets under the security to the company. Although he has extensive powers and, through the deemed agency device, considerable protection from liability when exercising his powers, the Act imposes duties and liabilities on him to which he needs to pay careful attention when acting. In this section we consider three of the most important of these, namely:

(a) personal liability on contracts and in respect of employment contracts;

(b) general statutory duties in the exercise of his powers;

(c) statutory duties for the preparation of a report and accounts.

(a) Personal liability on contracts and in respect of employment contracts

An Administrative Receiver will be personally liable on any contract that he enters into in the performance of his functions219 except to the extent that the contract excludes or limits his liability220. The liability is only in relation to post-receivership contracts that he enters into

However, as regards pre-receivership employment contracts, the position is different: for these, he is also liable, during the period of receivership, in respect of pre-receivership employment contracts that he adopts221. For these purposes, he is deemed to have adopted a contract if notice of termination of the contract is not given within 14 days after his appointment222, but the legislation contains an important protection for the Administrative Receiver during that 14-day period following his appointment i.e. any action or omission by him during that period does not amount to adoption and further does not contribute to such adoption223. Thus, for example, if in that 14-day period he asks the employees to provide him with information about the company, that will not amount to adoption of their employment contracts.

The liability is for wages or salary, and for holiday pay, sick pay and pension contributions. However, the Act makes clear that it does not impose any liability for services rendered prior to the commencement of the Administrative Receivership224. The Act gives an Administrative Receiver an indemnity from the assets over which he was appointed for these liabilities225 (i.e. for post-receivership contracts, and for employment contracts that he adopts), and such statutory indemnity does not limit any other indemnity that he has226. However, the statutory indemnity does not apply for liability on a contract entered into without authority227 nor does it limit his liability on such contracts228.

(b) General statutory duties in the exercise of his powers

The Act imposes certain duties on him when exercising those powers. Under section 128, he must exercise them (a) in good faith and for a proper purpose229, and (b) in a manner which he believes (on reasonable grounds) to be in the best interests of the person for whom he was appointed230. To the extent consistent with that, he should also have reasonable regard to the interests of creditors, sureties, persons claiming through the company an interest in the assets over which he was appointed, and the company. To give teeth to these provisions, the Act goes on to provide that where he acts in accordance with any directions given by the person in whose interest he was appointed, he cannot be in breach of the duty in (1) (b), but may still be liable for any breach of the duties in (1) and the duties to the creditors etc231.

The Act also codifies the duty (applicable in equity to all receivers including Administrative Receivers), when selling assets, to obtain the best price reasonably obtainable at the time of the sale232. The duty is owed to creditors, sureties, persons claiming through the company an interest in the assets over which he was appointed, and the company. The Administrative Receiver’s deemed statutory agency for the company is not a defence to a breach of this duty233, and he is not entitled to any indemnity from the assets over which he was appointed for any liability he incurs for such breach234.

In our view, these provisions do not alter the limited duties that he owes to the company at law. Thus, he is not under a duty to take reasonable care in choosing the time at which to effect a sale of the assets over which he is appointed235, nor is he under a duty to improve the condition or value of such assets236 (but he will be under a duty to preserve their value). He is also under no duty to carry on the business of the company, but if he does so, he owes a duty to the company to take reasonable steps to try to do so profitably237.

(c) Statutory duties for the preparation of a report and accounts

One of the important statutory duties of an Administrative Receiver is to prepare a report within 3 months of his appointment essentially dealing with the Administrative Receivership.238 The report must include the events leading up to his appointment, any actual or proposed disposals of company assets, the carrying by him of the company’s business, the amounts payable to the person who appointed him and to preferential creditors, the amounts if any that may be available for other creditors, and the persons who submitted statements of affairs, summaries of which must be included in the report together with his comments. This report has to be filed with the Registrar, and provided to the company or its liquidator (and the FSC if the company is or was a regulated person i.e. the holder of a prescribed financial licence)239. Creditors should have access to the report – he can either send it to them or publish an address from which they can obtain a copy240.

He must also call a meeting of unsecured creditors241 unless he obtains a Court order permitting him not to call such a meeting, but he needs to have stated that in the report and the company and its creditors must have been sent the report 14 days before such a hearing242.

Another important statutory duty on the Administrative Receiver is to prepare detailed accounts of receipts and payments to cover particular statutory periods and they have to be filed with the Registrar (and the FSC if the company is or was a regulated person)243.

4.9 Special protection for preferential creditors

The Act gives special protection for debts owed to preferential creditors if the company is not in liquidation but an Administrative Receiver has been appointed. Such creditors have to be paid out of assets coming into the Administrative Receiver’s hands in priority to the claims of the floating charge holder who appointed and any other floating chargee. The priority is over claims for both capital and interest. Preferential creditors will be defined in the Rules, and this provision is part of the general policy of protecting certain types of creditors. Given the absence of BVI tax for IBC’s, the significance of this will be limited.

The Administrative Receiver’s obligation is not relieved merely because the company goes into liquidation subsequently244.

However, the payments made are to be recouped, as far as possible, out of the company’s assets available for payment of unsecured creditors, and thus, if there are any assets available for unsecured creditors, they will bear the real burden of claims by preferential creditors.245

4.10 Resignation and removal of an Administrative Receiver

An Administrative Receiver can resign at any time provided that he gives not less than 7 days notice of his intention to resign to his appointor, the company (or its liquidator if it is in liquidation), and any creditors’ meeting246. He must vacate his office if he ceases to be eligible to act as Administrative Receiver (e.g. because he ceases to be a licensed insolvency practitioner)247.

Only the Court can remove an Administrative Receiver248 but the application for such an order can be sought by the company (or its liquidator if it is in liquidation), the company’s board, the person who appointed him, a creditor of the company, the FSC if the company is or has been a regulated person, or any other person whom the Court is satisfied has a legitimate interest in his removal249.

4.11 The role of the Court in Administrative Receiverships

The Court has only a limited role to play in Administrative Receiverships and they therefore provide a quick and effective method for secured creditors to enforce their security. However, resort to the Court is not entirely excluded for, as noted above, the Court can appoint an Administrative Receiver; it can permit him to dispose of property over which there is a security interest taking priority over that of the person who appointed him; and only the Court can remove him from office. It also has the power to review and fix an Administrative Receiver’s remuneration250.

The Act also provides the Court with extremely wide power to give directions on any matters arising in connection with the performance of the functions of the Administrative Receiver251. The Court can give such directions as it considers appropriate, it can make orders declaring the rights of any persons before it (which will be very useful if there are any priority disputes over the company’s assets), or indeed make such orders as it considers just. The persons who can apply for such an order are the Administrative Receiver, the person by whom he was appointed or in whose interest he is acting, or the FSC if the company is or has been a regulated person.

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Footnotes

98 Section 75(2)

99 Section 77(2)(a) as amended

100 Charterhouse Investment Trust Ltd v Tempest Diesels Ltd (1985) 1 BCC 99, 544; Runciman v Walter Runciman plc [1993] BCC 223.

101 Re Equitcorp International plc [1989] BCLC 597

102 Section 75(2)(b)

103 Section 75(2)(c)

104 Section 75(2)(d)

105 Section 80

106 Section 77(1)(a)

107 Section 8(1)

108 Section 8(1)(a) of the UK Insolvency Act 1986

109 Re Harris Simons Construction Ltd [1989] BCLC 202

110 Section 77(1)

111 Re Imperial Motors (UK) Ltd. [1990] BCLC 29

112 Re St. Ives Windings Ltd (1987) BCC 634; Re Business Properties Ltd. (1988) 4 BCC 684

113 Section 79(3)(b) as amended

114 Section 79(2)(b)

115 Re Croftbell [1990] BCLC 844

116 Section 79(2)(b)(i)

117 Section 79(2)(b)(ii)

118 Section 79(2)(a)

119 Section 83(1)

120 Section 84(1)(b)

121 Section 84(1)(c)

122 Section 84(1)(d)

123 Carr v British International Helicopters Ltd [1993] BCC 855

124 Section 84(1)(e)

125 Section 84(1)(f)

126 Section 84(1)(a)

127 Section 85(1)(a)

128 Section 85(1)(b)

129 Section 85(1)(c)(ii)

130 Sections 85(1)(b) and 85(1A)

131 Section 85(1)(c)

132 Section 86(2)

133 Barclays Mercantile Business Finance Ltd v Sibec Developments Ltd [1992] 1 WLR 1253

134 Section 84(3)

135 Section 84(4)(d)

136 Section 84(5)(a)

137 Section 84(5)(b)

138 Section 84(4)(a)

139 Section 84(4)(b)

140 Re Olympia & York Wharf Ltd. [1993] BCLC 453

141 ibid

142 Section 84(4)(c)

143 Section 435

144 Re Atlantic Computers plc [1992] Ch 505; Bristol Airport plc v Powdrill [1990] Ch 744

145 Section 100(1)(a)

146 Section 100(1)(b)

147 ibid

148 Section 100(1)(c)

149 Section 100(1)(d)

150 Section 100(1)(e)

151 Section 87(1)

152 Section 87(2)

153 Section 88(1)

154 Section 89(1)

155 Re Charnley Davies Ltd (No. 2) [1990] BCLC 760

156 Cuckmere Brick Co. Ltd. v. Mutual Finance Ltd. [1971] Ch. 949; China and South Sea Bank Ltd. v. Tan Soon Gin [1990] 1 A.C. 536; Downsview Nominees Ltd. v. First City Corporation Ltd. [1993] A.C. 295

157 Medforth v Blake [2000] Ch 86

158 Silven Properties Ltd v Royal Bank of Scotland [2004] 1 WLR 997

159 Section 91

160 Section 92(1)

161 Re Atlantic Computers [1992 Ch 505; Barclays Mercantile Business Finance Ltd v Sibec Developments Ltd [1992] 1 WLR 1253

162 Re Home Treat Ltd [1991] BCLC 705

163 See sections 244 – 250 as amended

164 Section 87(4) as amended

165 Section 98(1), (3)

166 Section 98(4)

167 Sections 98(5), 254

168 See Re Smallman Construction Ltd [1989] BCLC 420

169 Section 113

170 Section 114(4)(d)

171 Cornhill Insurance plc v Cornhill Financial Services Ltd [1992] BCC 818

172 Section 110(1)

173 Section 110(2)(a)

174 Section 110(2)(b)

175 Section 114(4)(d)

176 Section 111(1)(a)

177 Section 111(1)(b)

178 Medforth v Blake [2000] Ch 86; Silven Properties Ltd. v Royal Bank of Scotland plc [2004] 1 WLR 997

179 Section 175(2)

180 Re Leisure Study Group Ltd [1994] 2 BCLC 65

181 Section 81(b)

182 Section 142(1)

183 See definition of floating charge in Section 2(1)

184 Section 139(3)

185 Section 139(2)

186 Section 139(2)

187 Section 139(5)

188 Section 118(1)(a)

189 Section 118(1)(b)

190 Section 118(2)(a)

191 Section 119(2)(b)

192 Sections 117(1), (3) and 139(4), and cf. section 33(2) of the UK Insolvency Act 1986 (before it was amended by the Enterprise Act 2002)

193 See the article by Dr Fidelis Oditah (now QC) in [1991] JBL 49

194 Section 142(2)(a)

195 Section 142(2)(b)

196 See, obiter, Re A & C Supplies Ltd [1998] 1 BCLC 603

197 Section 143(1)

198 Section 143(2)

199 Section 143(3)

200 Section 474(1) & (2)

201 See especially section 476

202 Section 474(3)(b)

203 Section 116(1)(e)

204 Section 116(1)(a)

205 Section 116(1)b)(i)

206 Section 116(1)(b)(ii)

207 Sections 116(1)(c), 477 and 260(4)

208 Sections 116(1)(d), 482(2)

209 Section 116(1)(ee)

210 Section 116(1)(f)

211 Section 126(2) & (3)

212 Airlines Airspares Ltd v Handley Page Ltd [1970] Ch 193

213 Gomba Holdings UK Ltd. V Minories Finance Ltd [1988] 1 WLR 1231 at 1233-1234

214 Section 144 & Schedule 1

215 Schedule 1

216 Section 145

217 Section 124(1)

218 Sections 146 & 275

219 Section 130(1)(a)

220 Section 130(2).

221 Section 130(1)(b)

222 Section 130(4)(b) as amended

223 Section 130(4)(a)

224 Section 130(6)(a)

225 Section 130(5)

226 Section 130(6)(b)

227 Section 130(6)(d)

228 Section 130(6)(c)

229 Section 128(1)(a)

230 Section 128(1)(b)

231 Section 128(3)

232 Section 129(1). See generally Cuckmere Brick Co. Ltd. v. Mutual Finance Ltd. [1971] Ch. 949; China and South Sea Bank Ltd. v. Tan Soon Gin [1990] 1 A.C. 536; Downsview Nominees Ltd. v. First City Corporation Ltd. [1993] A.C. 295

233 Section 129(3)(a)

234 Section 129(3)(b)

235 Cuckmere Brick Co. Ltd. v. Mutual Finance Ltd. [1971] Ch. 949; China and South Sea Bank Ltd. v. Tan Soon Gin [1990] 1 A.C. 536; Downsview Nominees Ltd. v. First City Corporation Ltd. [1993] A.C. 295

236 Silven Properties Ltd v Royal Bank of Scotland [2004] 1 WLR 997

237 Medforth v Blake [2000] Ch 86

238 Section 147(1)

239 Section 147(3)(a)

240 Section 147(3)(b) as amended

241 Section 147(3)(c)

242 Section 148

243 Section 136

244 See Te Eisc Teo Ltd [1991] ILRM 760

245 Section 131(3)

246 Section 122

247 Section 120(2)

248 Section 123(2)

249 Section 123(3)

250 Section 134 generally

251 Sections 132 & 133 

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