Chambers Global Practice Guide To Insolvency 2024: British Virgin Islands

Trends

Market analysis

Throughout 2024, the British Virgin Islands (BVI) has remained one of the most significant interna­tional jurisdictions for company incorporations. According to the latest BVI Financial Services Commission (FSC) statistical bulletin dated June 2024, in the BVI there were 358,592 active busi­ness companies with a further 2,468 active lim­ited partnerships.

The BVI continues to retain 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, the BVI has proved to be a resilient and agile jurisdiction that has been at the forefront of emerging insolvency and restruc­turing sectors, including those in the real estate and crypto-asset spaces.

The BVI has also shown its ability to react quick­ly to major world and economic events, demon­strated during the past year by its implemen­tation of large-scale and complex restructuring measures resulting from distressed events over­seas (including, but not limited to, the downturn of the real estate market in the People's Republic of China) and expansion of the statutory assis­tance regime under the BVI Insolvency Act to include 24 additional jurisdictions.

Crypto-assets

The BVI continues to show that it is a market leader when dealing with distressed crypto-asset funds and trading platforms.

In February 2024, joint receivers were appoint­ed by the BVI court over all assets held by or on behalf of Hector DAO. The purpose of their appointment was to wind down Hector's opera­tions to include the distribution of assets to its creditors. However, during this process, a num­ber of creditors took proceedings against Hec­tor in New Jersey, which prompted the receiv­ers to seek Chapter 15 recognition in the United States.

In July 2024, the receivers secured a landmark ruling from the bankruptcy judge Michael B Kaplan granting cross-border recognition of Hector DAO under Chapter 15 of the US Bank­ruptcy Code. This decision was the first of its kind and offers a helpful precedent to insolvency and legal practitioners operating in the BVI digi­tal asset space.

Restructuring

The BVI has also seen a general uptick in court-supervised restructurings during the past year.

The BVI Business Companies Act (the "BCA"), provides two court-led mechanisms to aid com­panies in financial difficulties. The first is a plan of arrangement, which permits a company to:

• amend its constitution;
• reorganise, merge or consolidate;
• dispose of assets;
• approve the dissolution of the company; or
• a combination of these things.

The second is a scheme of arrangement, which is a statutory mechanism that permits a compa­ny to enter into an arrangement between it and its creditors or between it and its shareholders. In certain circumstances, it allows a company to restructure and avoid entering into a formal insolvency process.

It can be initiated by the company, a creditor, a shareholder or a liquidator applying to the BVI court for a meeting of creditors or sharehold­ers. There is no requirement for the company to be insolvent when the application to the court is made. The scheme will be approved if 75% in value of the creditors or class of creditors or shareholders or class of shareholders present and voting at a meeting agree to the scheme.

Plans of arrangement remain underutilised in the BVI but schemes of arrangement have become increasingly popular in the BVI during 2023.

In 2024, the BVI courts have been involved in several significant international restructurings that originate from the financial difficulties in the Chinese real estate market. The BVI has played host to substantive schemes of arrangement and has also seen restructuring proposals used to attempt to adjourn liquidation applications brought against BVI companies in the BVI and elsewhere.

One of the most notable scheme decisions of the past year has been that of Tristan Oil Ltd v The Scheme Creditors BVIHCM 0120/2023 (the "Tristan Decision"), whereby the BVI court examined the specific criteria required of a third party to demonstrate a substantial interest in a proposed scheme of arrangement, thereby con­ferring upon it the requisite standing to be heard and raise objections in respect of an application to sanction the scheme pursuant to the provi­sions of the BCA.

The Tristan decision

Tristan was incorporated in 2006 as a special purpose vehicle to raise finance to fund the operations of two oil and gas companies operat­ing in the Republic of Kazakhstan (the "Guarantors"). The Guarantors fell within Tristan's wider corporate group.

Tristan issued credit notes, due in 2012, to vari­ous investors (the "Original Noteholders") and raised approximately USD531 million which it advanced to the Guarantors to fund their oil and gas operations in Kazakhstan.

Contrary to the group's expectations, Tristan alleged that the Republic of Kazakhstan expro­priated the Guarantors' rights and interests under contracts that they had for exploiting oil­fields in the west of the country.

In 2010, individuals and entities affiliated with the group (collectively referred to as the "Claimant Parties"), excluding Tristan, initiated Swedish-seated arbitral proceedings against Kazakhstan, culminating in a favourable final judgment in the 5 Claimant Parties' favour totalling approximate­ly USD500 million plus interest (the "Award"). The Swedish Supreme Court dismissed two attempts by Kazakhstan to overturn the Award and, by the time the scheme was proposed, all potential appeals against the Award had been conclusively dismissed.

Notwithstanding its failed appeals, Kazakhstan failed to comply with the terms of the Award, prompting the Claimant Parties to commence enforcement actions against it in multiple juris­dictions, including Sweden, Belgium, Luxem­bourg, Italy, the Netherlands, England, and the US. The Claimant Parties eventually ran out of money to continue funding their enforcement efforts, and so Tristan decided to take steps to raise additional funds from new investors to con­tinue the execution proceedings.

Without the additional funding, the enforce­ment actions would have ground to a halt and there would have been no prospect of meaning­ful recovery of the Award. Having secured new sources of funding, Tristan proposed a scheme of arrangement with the Original Noteholders and the new investors (the "Scheme"). Broadly speaking, the Scheme would see new investors become senior creditors. They would be given priority in the waterfall of repayments by Tristan, with the Original Noteholders receiving repay­ment only after the senior noteholders. It was as a result of this variation of rights of the Original Noteholders that the Scheme was proposed.

In August 2023, Tristan obtained a court order to convene a creditors' meeting and, at a scheme meeting held in early October 2023, the Scheme received approval from creditors, representing 81.8% in value of those present and voting. On 1 November 2023, the BVI court sanctioned the Scheme pursuant to Section 179A of the BCA (the "Sanction Order"). The Sanction Order was subsequently recognised in the US (pursuant to Chapter 15 of the US Bankruptcy Code).

Following the Sanction Order, Kazakhstan, along with the National Bank of Kazakhstan (collective­ly referred to as the "Kazakh Parties"), submit­ted separate applications in the then-concluded scheme proceedings. Their applications sought, among other things:

• a declaration that the Kazakh Parties were interested parties in the scheme proceedings;
• an order formally adding them as parties to the scheme proceedings; and
• to set aside the Sanction Order.

In support of their applications, the Kazakh Parties put before the Court certain BVI orders recognising monetary judgements obtained by them in England against the Claimant Parties (the "Registered Judgments").

In summary, the Kazakh Parties contended that:

• the Scheme would improperly equip Tristan with the financial resources to support enforcement efforts in respect of an award that had been secured through deceit; and
• the variation of terms proposed by the Scheme would see the Claimant Parties receive less, which would prejudice the Kazakh Parties' efforts to execute the Registered Judgments against them.

Judgment

The BVI court found the Kazakh Parties were not entitled to a declaration that they were inter­ested parties for the purposes of the Scheme. Notwithstanding their lack of standing, the BVI court also found that it did not have jurisdiction 6 to revisit the terms of the Sanction Order, which was a final sealed order of the BVI court.

Upon careful examination of the English case law, including the principles set out in Re Lamo Holdings BV [2023] EWHC 1558, the court held that a "relevant interest" is one "that would be affected by the Scheme itself, or the implemen­tation thereof, in a way that is sufficient for a court to say that the Scheme should not be sanctioned".

The judge held that the Kazakh Parties were not creditors under the Scheme, and therefore their complaints about the Claimant Parties' recov­eries were non sequitur for the purposes of an application under Section 179A of the BCA. The Kazakh Parties' rights were against the Claimant Parties by virtue of the Registered Judgments and the Scheme did not affect those rights therefore.

The fact that the Claimant Parties may have fewer assets against which the Registered Judg­ments could be enforced was not considered a sufficiently proximate event which would cause the BVI court to withhold its sanction of the Scheme.

The judge emphasised that the Scheme was a contractual arrangement within the creditor-company relationship, not directly influencing third-party rights or claims external to this frame­work and that, while the BVI court has discretion to hear third-party objections on an application to sanction a scheme of arrangement, it will be reluctant to override or undermine an agreement reached between a company and its creditors.

As for the Kazakh Parties' allegations that the Award was obtained by fraud, the BVI court held they remained entitled to pursue those argu­ments, albeit in the various enforcement pro­ceedings, and not ex-post as part of the scheme proceedings, as they sought to do.

Fresh guidance on BVI court-supervised restructuring mechanisms, including schemes and plans of arrangement, is particularly well-received given current market conditions, which have seen distressed groups turning more and more often to the BVI court for assistance with cross-jurisdictional, intra-group restructurings.

Developments

Expansion of statutory assistance regime

The BVI has a long history of assisting foreign insolvency proceedings and, under Part XIX of the BVI Insolvency Act, 2003, "foreign repre­sentatives" (essentially, insolvency officeholders) from certain designated jurisdictions may apply to the BVI court for a range of remedies to ena­ble the foreign representative to gain control of assets and take other steps to secure property and information within the jurisdiction in support of the foreign insolvency proceedings.

Before 18 September 2024, the list of desig­nated jurisdictions for the purposes of Part XIX of the BVI Insolvency Act included New South Wales (Australia), Canada, Finland, Hong Kong SAR (China), Japan, Jersey, New Zealand, the United Kingdom and the United States of Amer­ica. However, the BVI FSC and insolvency prac­titioners regularly assess the BVI's strategic role in global financial structures as well as the inter­play between the BVI and other financial centres such as the Cayman Islands, Singapore and the Channel Islands (to name a few).

Following a recent consultation, the list of des­ignated jurisdictions has been expanded to include:

• the Bahamas;
• Barbados;
• Belize;
• Bermuda;
• the Cayman Islands;
• Guernsey;
• Guyana;
• Ireland;
• the Isle of Man;
• Jamaica;
• Member states and territories of the Organisation of Eastern Caribbean States (OECS) (Saint Kitts and Nevis, Saint Lucia, Antigua and Barbuda, the Commonwealth of Dominica, Anguilla, St Vincent and the Grenadines, Grenada, Montserrat, Guadeloupe and Martinique);
• Nigeria;
• Singapore;
• Trinidad and Tobago; and
• the Turks and Caicos Islands.

Foreign officeholders from the jurisdictions listed above are now able to apply to the BVI court for orders in support of foreign insolvency proceed­ings. This development reflects the BVI's ongo­ing commitment to maintaining its position as a premier financial hub by adapting to the evolving global financial landscape and embracing com­ity with other leading financial centres.

Arbitration clauses and applications to appoint liquidators

In June 2024, the Judicial Committee of the Privy Council handed down its long-awaited decision in Sian Participation Corp v Halimeda Interna­tional Ltd [2024] UKPC 16.

In its decision, the Judicial Committee rejected the long-standing approach in Salford Estates (No 2) Ltd v Altomart Ltd (No 2) [2014] EWCA Civ 1575 (the "Salford Decision"), where the English Court of Appeal held that winding up proceed­ings should be stayed in favour of arbitral pro­ceedings save for exceptional circumstances. In so finding, the Court held that "none of the general objectives of arbitration legislation... are offended by allowing a winding up to be ordered where the creditor's unpaid debt is not genu­inely disputed on substantial grounds. To require the creditor to go through an arbitration where there is no genuine or substantial dispute as the prelude to seeking a liquidation just adds delay, trouble and expense for no good purpose".

Background

The respondent, Halimeda International Ltd ("Halimeda"), is a subsidiary of a Russian trans­portation and logistics group, and the appel­lant, Sian Participation Corp ("Sian") is part of the corporate structure through which a minor­ity shareholding in the group was held. Halim­eda advanced a term loan of USD140 million to Sian under a facility agreement. The loan was not repaid in accordance with the facility agree­ment's terms and Halimeda issued a demand for USD226 million as of December 2020. Sian disputed the debt on the basis of a cross-claim and/or set-off, alleging, among other things, that Halimeda had participated in a corporate raid against the appellant's shareholding in the group, backed and instigated by the Russian state. Halimeda denied the existence of, and its involvement in, the corporate raid.

On 29 September 2020, Halimeda applied to have liquidators over the affairs of Sian on the basis that it was both cash flow and balance sheet insolvent. Sian opposed the application and sought a stay or dismissal of the BVI pro­ceedings on the ground that the facility agree­ment contained a widely drawn arbitration clause in favour of the London Court of International Arbitration (LCIA).

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