British Virgin Islands: The Insolvency Review - 5th Edition (British Virgin Islands)

I INSOLVENCY LAW, POLICY AND PROCEDURE

i Statutory framework and substantive law

British Virgin Islands (BVI) law is a mixture of statute and common law. The principal statute governing corporate and personal insolvency in the BVI is the Insolvency Act 2003 (the Act), which is supported by the regulations set out in the Insolvency Rules 2005 (the Rules).

The fundamental principle underlying BVI insolvency law, which closely follows English law in many respects, is the pari passu treatment of creditors. Accordingly, subject to contractual arrangements to the contrary, and to a very small category of preferential creditors (which rarely amounts to anything in practice), unsecured creditors share equally in the assets of an insolvent company available for distribution. The Act specifically recognises and protects the rights of secured creditors to enforce their security, and secured creditors do not compete with unsecured creditors in respect of the secured element of their claim. The commencement of BVI insolvency proceedings does not affect the ability of a secured creditor to enforce its security in accordance with its terms.

The Act provides for a range of transactional avoidance provisions designed to give effect to the pari passu principle, including the avoidance of preferential payments to creditors and transactions at an undervalue. The Act also provides remedies for fraudulent and insolvent trading.

ii Policy

The policy issues underlying the treatment of insolvent companies in the BVI are those applicable to a major offshore financial centre. BVI companies are widely used as holding companies for investment vehicles and for structuring purposes, and the BVI legal environment is, therefore, creditor-friendly and predictable.

As such, while there are procedures available – principally by way of a scheme of arrangement – whereby debt and company restructurings can be promoted, the BVI currently has no specific rehabilitation procedure equivalent to Chapter 11 in the United States or administration in England and Wales. There is an administration process set out in the Act, but it has never been brought into force and its status is currently under review.

iii Insolvency procedures

The principal insolvency procedure for insolvent BVI companies is liquidation, which is described in more detail below.

One of the remedies of a secured creditor is to appoint a receiver or administrative receiver to deal with the secured assets. Those remedies have statutory recognition under the Act. Receivers are regularly appointed over the assets of BVI companies by the holders of security over those assets. Because a BVI company's assets are typically outside the BVI, such receivers are predominantly appointed in the jurisdictions in which those assets are located, whether pursuant to the provisions of security governed by BVI law or pursuant to the provisions of local law. The Act imposes only a minimal layer of administrative burden in the BVI for receivers appointed abroad, which is essentially limited to giving notice of the appointment to the company in the BVI and the Registrar of Companies.

A procedure called a creditors' arrangement can also, in theory, be used to reorganise and compromise a company's debts. In practice, however, this is little used because it does not provide for a moratorium on creditors' claims while it is implemented.

Liquidation is overwhelmingly the most common insolvency procedure, and is, therefore, the focus of this chapter. Liquidation involves the appointment of one or more liquidators for the purposes of collecting in and realising the company's assets, and distributing the proceeds of the assets to those entitled to them in the order of priority prescribed by the Act.

iv Starting proceedings

An insolvent liquidation can be initiated out of court by resolution of the shareholders of the company, or it can be commenced by application to the court by a creditor, the company itself, the shareholders, the supervisor of a creditors' arrangement, the Financial Services Commission or the Attorney General.

When an application is made to court for the appointment of a liquidator, notice of the hearing must be published in the jurisdictions in which the company did business, with the aim of bringing the hearing to the notice of the company's creditors. Those creditors are entitled to appear and be heard on the application to court. Generally speaking, if an unpaid, undisputed creditor applies for the appointment of a liquidator on the grounds that the company is insolvent, the court will ordinarily exercise its discretion in favour of appointing a liquidator; however, if the majority of creditors oppose the appointment of a liquidator for good reason, the court may (but will not be bound to) have regard to their views.

v Control of insolvency proceedings

Plenary insolvency proceedings in the BVI are controlled by the company's liquidator. The liquidator's powers derive from the Act. In a court-appointed liquidation they will also be subject to the terms of the order appointing the liquidators. Typically, if the liquidator in a court-commenced liquidation wants to exercise significant powers such as the sale of assets and the bringing of legal proceedings, he or she will require the court's sanction to do so on an application made specifically for that purpose.

Except where the order appointing the liquidator specifically requires the liquidator to seek sanctions, the court's involvement with the liquidation will otherwise be relatively limited. The liquidator is entitled – and indeed expected – to use his or her skill and professional judgement and to run the liquidation using his or her own discretion. It should be noted in this regard that the BVI has a licensing regime for insolvency practitioners, operated by the Financial Services Commission, and only a BVI-licensed insolvency practitioner (and occasionally a similarly qualified foreign appointee who takes the appointment jointly with a BVI licensee) can be appointed as the liquidator of an insolvent BVI company.

Nevertheless, the court has overall control over the liquidation. Liquidators are entitled to – and frequently do – ask the court for directions about difficult questions or as to whether to pursue particular courses of action arising in a liquidation, even if they do not need formal sanction to exercise particular powers. Creditors and those with a legitimate interest in the liquidation are also entitled to apply to court for assistance, for example, if they are dissatisfied with a decision of the liquidator or the liquidator rejects their claim. A liquidation with significant numbers of creditors will often have a formal creditors' committee, which will provide a sounding board for the liquidator.

Liquidators' fees are generally approved either by the creditors' committee (if there is one) or the court (if not). In the event that there is a single creditor funding the liquidation directly, such that the liquidators' fees are not taken from the assets of the company, court practice is usually to leave the approval of those fees to the creditor in question. Once a liquidator of a BVI company is appointed, the directors' powers effectively cease, but the directors are required to assist the liquidator and can be ordered to provide information and deliver up assets or records in their hands to the liquidator.

vi Special regimes

Other than some modifications of the provisions of the Act for insurance companies, and provisions enshrining the effectiveness of netting arrangements in financial contracts, there are no special regimes applicable to different types or groups of BVI companies.

To read this Chapter in full, please click here.

Originally published by Law Business Research Ltd.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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