1. Market Trends and Developments
1.1 The State of the Restructuring Market
Throughout 2020, the British Virgin Islands (BVI) has remained one of the most significant offshore jurisdictions. According to the BVI Financial Services Commission (FSC) latest annual report, there were 402,907 active companies in the BVI.
The BVI has retained its status as one of the most significant jurisdictions in the international corporate service sector and, in particular, the insolvency and restructuring sector. Throughout this period, and during its recovery, the BVI has proved to be a resilient and agile jurisdiction.
In February 2019, the BVI court appointed, for the first time, "soft touch" provisional liquidators with a restructuring mandate. This approach provides for the appointment of courtappointed provisional liquidators with a restructuring mandate whilst allowing the incumbent directors to remain in place, thereby minimising any disruption to the day-to-day operations of the company and providing essential breathing room by invoking a statutory moratorium on claims. It is anticipated that this decision will result in an upturn in corporate restructurings in the BVI.
Prior to this recent decision, court-supervised restructurings were not prevalent in the BVI with statistics showing a trend towards insolvencies. In 2018, there were a total of 37 applications to the BVI court to appoint a liquidator, of which 32 resulted in a liquidator being appointed and the companies commencing a winding-up process. In addition, there were 19 voluntary appointments of a liquidator in 2018 following a members' resolution.
The COVID-19 pandemic has posed problems to the global economy and the BVI financial services community has proven once again that it is resilient and innovative when it comes to dealing with crisis situations. Similarly to the difficulties experienced following Hurricanes Irma and Maria in 2017, the BVI court quickly switched to remote hearings and electronic filings. This prevented any delay in parties seeking access to justice and the FSC and Registry of Corporate Affairs have accepted search requests and filings electronically
The BVI is therefore well placed to deal with remote working and its public and professional bodies continue to work with the financial service sectors to ensure that its clients are properly catered for.
2. Statutory Regimes Governing Restructurings, Reorganisations, Insolvencies and Liquidations 2.1 Overview of Laws and Statutory Regi
2.1 Overview of Laws and Statutory Regimes
The principal legislation for restructuring, reorganisation and insolvencies in the BVI is the Insolvency Act, 2003 (the IA) and the Business Companies Act, 2004 (the BCA). The IA sets out the procedures for insolvent liquidations and the appointment of administrative receivers. The BCA sets out the statutory framework for company restructuring and reorganisation as well as the voluntary liquidation regime.
2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership
The key insolvency and restructuring procedures available in respect of corporate entities registered in the BVI are:
- voluntary liquidation;
- provisional liquidation;
- official liquidation; and
- schemes of arrangement.
It is also possible for receivers to be appointed over BVI companies (either by the BVI court or by a creditor of the company with suitable security).
Plan of Arrangement
A Plan of Arrangement is initiated by the director(s) of a company or, if the company is in voluntary liquidation, by the voluntary liquidator. There is no requirement for a company to be insolvent before a Plan of Arrangement can be considered
The Plan of Arrangement may permit a company to:
- amend its memorandum and articles of association;
- reorganise, merge or consolidate, or separate its businesses;
- dispose of any assets, business, shares, debt or other securities;
- approve the dissolution of the company; or
- put in place any combination of the above.
Once the director(s) have approved the Plan of Arrangement, they must apply to the BVI court to approve the plan.
The court will determine to whom notice of the proposed plan should be given and whether the approval of any individual is required. The court will also determine whether any holder of shares, debt obligations or securities in the company can dissent from the proposed plan. If so, any dissenting party may receive payment of fair value in respect of its shares, debt obligations or other securities (Section 179 of the BCA).
Once the plan is approved by those persons (if so ordered), the director(s) will execute (on behalf of the company) the articles of arrangement.
Scheme of Arrangement
A scheme is a statutory form of compromise or arrangement between a company and its creditors (or any class of them) or its shareholders (or any class of them). There is no statutory definition of the terms "compromise" or "arrangement". The BVI Court will construe them broadly but they must involve some element of accommodation or "give and take" between the company and the scheme creditors or shareholders.
The principal uses of BVI schemes are to reorganise the company's share capital, to enable a company to restructure its liabilities and avoid an insolvent liquidation, or to alter the distribution rights of creditors and/or shareholders in the company's liquidation.
Scheme proceedings can be commenced by the company, by any creditor or shareholder of the company or (where the company is being wound up) by a liquidator. Scheme proceedings commenced by a creditor or shareholder would, however, require the company's support.
If a moratorium is required during the scheme process, the company will present a winding-up petition and apply for an order appointing provisional liquidators prior to filing the scheme petition.
If the scheme is supported by more than 50% by number and 75% by value of those attending and voting in each scheme class, and is subsequently approved by the court, it will bind all scheme creditors/shareholders (including those who did not vote or who voted against the scheme) in accordance with its terms.
The scheme process is not confidential. Detailed scheme documentation will be sent to all scheme participants and may also be advertised, depending on the circumstances.
If the scheme is agreed by the requisite majority of creditors/ shareholders of the company, the applicants must return to the court for the scheme to be approved. However, an order sanctioning the scheme will only take effect when filed with the BVI Registrar of Companies (the Registrar).
All scheme participants have the right to appear by counsel at the scheme sanction hearing. They may also appear at the convening hearing, although the convening application will typically be made on an ex parte basis unless there are contentious issues of class composition or jurisdiction.
If there is any uncertainty over creditors' claims, this will principally be relevant for the purposes of voting at the scheme meetings and distributions to be made under the scheme. As regards the former, the BVI court might give directions at the convening hearing regarding the valuation of claims for voting purposes, or it may leave that issue to be addressed by the chairperson of the scheme meetings. As regards the latter, the scheme document will typically contain a mechanism for determining claims, post-sanction of the scheme, for distribution purposes.
There is no fixed duration for a Scheme of Arrangement, and its length will be determined by the directions given by the court.
The BCA contains provisions for the winding-up of a company, provided it has no liabilities or is able to pay its debts as they fall due. See 7.1 Types of Voluntary/Involuntary Proceedings.
This process involves the appointment of an independent insolvency practitioner. He or she is required to take possession of, protect and realise the company's assets for the benefit of the creditors of the company
There are two mechanisms for placing a company into insolvent liquidation:
- the passing of a shareholders' qualifying resolution – members of an insolvent company may, by a majority of at least 75%, pass a resolution appointing an eligible insolvency practitioner as liquidator of the company; or
- by order of the court – the application can be made by the company itself, a creditor of the company, a shareholder, the supervisor of the Company Creditors' Arrangement or, in very limited circumstances, the Attorney General or the FSC.
The court will take into account any one of three substantive tests when considering whether to appoint a liquidator. The first is whether the company is insolvent. In practice, this is the most frequently relied upon, and may be established by showing:
- a failure to comply with a statutory demand for an undisputed debt exceeding USD2,000 within 21 days (the company can apply to set aside the demand within 14 days of the date of service);
- execution issued on a judgment being returned unsatisfied;
- balance sheet insolvency; or
- an inability to pay debts when they fall due (cash-flow insolvency).
Originally published by Chambers & Partners.
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