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

GUIDE 3: ADMINISTRATION

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.

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.

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).

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.

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.

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.

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).

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.