Netting
The Insolvency Act, 2003 of the British Virgin Islands (the "IA") provides that netting provisions in financial contracts are exempted from the insolvency provisions of the IA. Significantly this includes voidable transactions. Even where an insolvent entity that is party to a financial contract goes into liquidation, this exemption will preserve the sanctity of the netting provisions contained in the relevant agreement(s).
A point of note is that this exemption is confined to financial contracts between two parties and does not include multi-party arrangements. As such, it is critical that netting arrangements are structured as bilateral contracts as opposed to multilateral contracts. Financial contracts are contracts pursuant to which payment or delivery obligations that have a market or an exchange price are due to be performed at or within a certain period of time.
Insolvency set-off
Section 150 of the IA provides that where, before the liquidation of a company, there have been mutual credits, mutual debts or other mutual dealings between a debtor and a creditor is claiming or intending to claim in the insolvency proceeding, only the balance of the account, if any, may be claimed in the insolvency proceeding or is payable to the debtor, as the case may be.
The IA also states that a creditor is not entitled to claim the benefit of a set-off if it had actual notice that the debtor was insolvent:
- at the time it gave credit to the debtor or received credit from the debtor; or
- at the time he acquired any claim against the debtor or any part of or interest in such a claim.
Validity of agreements to subordinate Debt
Where, before the commencement of the liquidation of a company, a creditor of that company acknowledges or agrees that, in the event of a shortfall of assets, it will accept a lower priority in respect of a debt than that which it would otherwise have, that acknowledgment or agreement takes effect regardless of a liquidation or bankruptcy of a party to that acknowledgment or agreement except to the extent that a creditor of the debtor who was not a party to the agreement is prejudiced.
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.