Restructuring & Insolvency Comparative Guide

1 Legal framework

1.1 What domestic legislation governs restructuring and insolvency matters in your jurisdiction?

The relevant legislation is:

• the Insolvency Act 2003 and the Insolvency Rules 2005, which out the procedures for:
• • creditors' arrangements;
  • insolvent liquidations; and
  • the appointment of receivers and administrative receivers; and
• the Business Companies Act 2004, which sets out:
• • the statutory framework for certain company restructurings and reorganisations (principally schemes and plans of arrangement); and
  • the voluntary (solvent) liquidation regime.

1.2 What international / cross-border instruments relating to restructuring and insolvency have effect in your jurisdiction?

The British Virgin Islands is not party to any treaties or cross-border instruments relating to restructuring and insolvency or bankruptcy, but it has adopted the Judicial Insolvency Network Guidelines for Communication and Cooperation between Courts in Cross-Border Insolvency Cases. Its domestic legislation relating to cross-border recognition and assistance is discussed in question 5.

1.3 Do any special regimes apply in specific sectors?

All companies incorporated in the British Virgin Islands may be subject to insolvency or reorganisation proceedings.

There is no specific legislation in the British Virgin Islands to deal with institutions which are 'too big to fail'; although in relation to any regulated company, no person may appoint a liquidator under the Insolvency Act without first notifying the Financial Services Commission, such that there is a degree of regulatory oversight in the case of insolvent financial institutions.

1.4 Is the restructuring and insolvency regime in your jurisdiction perceived to be more creditor friendly or debtor friendly?

The British Virgin Islands is a creditor-friendly jurisdiction. Secured creditors in particular enjoy very strong rights and protection, with a range of streamlined methods of enforcement readily available and very few barriers to taking security over corporate assets. Further, the Insolvency Act enshrines a well-recognised code for corporate insolvency which preserves and prioritises the interests of secured creditors. For example, the appointment of a liquidator will not prevent a secured creditor from taking enforcement action in relation to a secured asset. BVI law is receptive to inter-creditor agreements and subordination, making it suitable for complex financing and refinancing transactions.

1.5 How well established is the legal regime and infrastructure relevant to restructuring and insolvency in your jurisdiction (e.g. extent of recent legislative changes, availability of specialist judges / courts / advisers)?

The Insolvency Act and the Business Companies Act are well established and are generally perceived to provide a good legislative framework for insolvency and restructuring of BVI companies. In interpreting insolvency and company legislation, the BVI courts will also apply:

• well-established overarching principles of English common law; and
• local jurisprudence.

The Commercial Court – a specialist division of the BVI High Court – has exclusive remit over corporate insolvency matters. The first appellate court from the Commercial Court is the Eastern Caribbean Court of Appeal.

The Judicial Committee of the Privy Council is the final court of appeal for the British Virgin Islands, hearing appeals from the Eastern Caribbean Court of Appeal. The Privy Council sits in London and consists of justices who also sit in the UK Supreme Court.

2 Security

2.1 What principal forms of security interest are taken over assets in your jurisdiction?

The principal types of security taken are:

• a mortgage (either legal or equitable);
• an equitable fixed or floating charge;
• a floating charge; and
• a pledge.

The governing law of security created by a BVI company may be the law of such jurisdiction as agreed by the parties, but the formalities for the granting security are set out in the Business Companies Act.

A BVI company must maintain a private register of charges at its registered office. A public register of charges may also be kept by a company at the BVI Registry of Corporate Affairs.

2.2 How can those security interests be enforced (and what factors could complicate or prevent this process)?

The most common way to enforce security given by a BVI company is to appoint receivers pursuant to powers that are commonly included in security documentation. Receivers can then realise the secured property in satisfaction of the secured debt. In certain circumstances, a creditor with security over all or substantially all of a company's assets can appoint an administrative receiver, with broader powers to take control of a company and its assets, but this procedure is rarely used.

A secured creditor usually has rights under the relevant charge documentation to take possession of secured property itself and to effect a power of sale, but most secured lenders prefer to appoint receivers.

Most enforcement measures can be taken without the need for a court application, although there are certain company filing requirements under the Insolvency Act relating to the appointment of receivers.

Complications can arise where:

• there are multiple charges over the same property without adequate inter-creditor arrangements in place; and/or
• security has been granted but not publicly registered by the company.

Inter-creditor disputes which cannot be resolved by agreement may need to be determined by litigation – the Commercial Court is accustomed to dealing with such disputes. Occasionally, secured creditors fail to obtain ancillary security documents such as pre-signed share transfer forms or powers of attorney at completion of a finance transaction, which can lead to delays to enforcement and, ultimately, the need for court intervention.

3 Restructuring

3.1 Are informal workouts available in your jurisdiction? If so, what forms do they typically take, and what are the benefits and drawbacks as compared to formal restructuring proceedings?

Informal workouts are frequently seen in relation to BVI companies. These usually take the form of a conventional refinancing deal, with appropriate waivers. The benefits of an informal workout are that:

• formalities are minimal;
• disclosure and regulatory or court oversight can usually be avoided; and
• costs can be minimised.

The disadvantage is that outside a formal restructuring procedure, dissenting stakeholders cannot be bound, so informal workouts are generally not suitable for more complex restructurings with multiple stakeholders with competing interests.

3.2 What formal restructuring proceedings are available in your jurisdiction, and what are the benefits and drawbacks of each?

The Insolvency Act provides for companies to enter into a creditors' arrangement at the instigation of the company itself (or a liquidator). This is a creditor-approved arrangement, supervised by an insolvency practitioner, which can give effect to a debt restructuring plan or another form of debt restructuring.

In addition, the Business Companies Act 2004 provides for companies to enter into schemes of arrangement and plans of arrangement, which can be used to effect reorganisations and restructurings of debt, equity or both.

These arrangements provide mechanisms for BVI companies to deal with dissenting creditors or other stakeholders and result in an arrangement that binds the company and its members or creditors, or both (or a class thereof). However, none of these procedures provides for an effective moratorium against claims brought by stakeholders prior to the final approval of the scheme or plan.

The above procedures can all be used:

• to ensure that a company can continue trading despite financial difficulties; or
• to give effect to other forms of restructuring, reorganisations and so on.

While a creditors' arrangement can be implemented only if the debtor is insolvent or is about to become insolvent, a scheme or plan can be implemented where the company is solvent.

An insolvent restructuring may also be facilitated using the provisional liquidation procedure in the Insolvency Act, which can be initiated by the company or one or more of its creditors. In such cases, the provisional liquidators are given limited or 'light-touch' powers, with the management remaining in place and the provisional liquidators overseeing and assisting in the restructuring process, with court oversight. An order may be sought from the court to stay or restrain any action or proceedings pending against the company in provisional liquidation to assist the provisional liquidation process, although that falls short of the full statutory moratorium on claims that applies when a company enters liquidation. It is potentially possible for a provisional liquidator to pursue a scheme or plan of arrangement, if appropriate.

3.3 How, by whom and on what grounds are formal restructuring proceedings initiated? What are the main preconditions for success?

Creditors' arrangement under Part II of the Insolvency Act: A company creditors' arrangement is a compromise between a debtor and its creditors, the implementation of which is supervised by a supervisor, who must be a licensed insolvency practitioner. The Insolvency Act provides that an arrangement may:

• cancel all or any part of, or vary, a liability of the debtor; or
• vary the rights of the debtor's creditors or the terms of a debt.

Company creditors' arrangements are aimed at restructuring unsecured debt and will not bind a secured creditor or affect a right to enforce security unless the secured creditor expressly agrees in writing. Further, an arrangement cannot result in a preferential creditor receiving less than it would receive in a liquidation or bankruptcy of the debtor had it commenced at the time of approval of the arrangement, unless the preferential creditor expressly consents in writing.

Court approval is not required but the arrangement must be approved by 75% of the creditors to come into effect. Once approved, a creditors' arrangement is binding as between the company and its creditors (including dissenting creditors), but secured and preferential creditors will not be bound unless they consent in writing. Provision is made for prejudiced stakeholders to seek relief from the court. The arrangement is overseen by the supervisor, but the company's board remains in place and the company can continue to trade.

While the proposal for a company creditors' arrangement is initiated by the company itself, the drastic step of initiating the process (which may trigger covenant defaults) and the need for the support of 75% of creditors dictate that a company will rarely initiate the process without consulting creditors to ensure sufficient support.

Plan of arrangement under Section 177 of the Business Companies Act: A plan of arrangement under Section 177 of the Business Companies Act 2004 provides a flexible framework for companies to carry out a wide range of corporate actions, including a restructuring. The process can only be initiated by the company itself and requires court approval. There is a degree of flexibility as to the approvals required by members or creditors after the court has approved the proposed plan, and there is a statutory dissent procedure for aggrieved stakeholders.

Scheme of arrangement under Section 179A of the Business Companies Act: A scheme of arrangement under Section 179A of the Business Companies Act 2004 is a flexible mechanism that allows a company to effect compromises with classes of stakeholders, including creditors, in order to effect a restructuring in a manner that is binding on all stakeholders once approved by the necessary majority and the court. While there are some similarities with plans of arrangement, schemes are generally the favoured mechanism for complex restructurings and can be more effective in preventing minority dissent. Unlike plans of arrangement, schemes must be approved by a majority by value of 75% of each affected class. Further, schemes can be proposed not only by the company itself but also by creditors, members or a liquidator. Once finally approved by the court, the scheme is binding on all members of the relevant class or classes, with very limited rights of dissent.

Light-touch provisional liquidation under Section 170 of the Insolvency Act: Provisional liquidation is a court-sanctioned procedure that is available only where:

• a creditor has presented an application to appoint a liquidator (ie, the debtor is insolvent); and
• the provisional appointment is necessary to protect or preserve assets.

In recent years, the BVI court has appointed 'light-touch' provisional liquidators to facilitate a restructuring, generally in the context of a wider cross-border restructuring.

While provisional liquidation provides a degree of protection and 'breathing space' for the company and can enable the board to remain in control alongside the appointed insolvency practitioner, it does not prevent enforcement by secured creditors and there is no general moratorium on claims as there is in a final liquidation. Accordingly, while light-touch provisional liquidation can be an effective restructuring tool in appropriate cases, a degree of buy-in is still required from a range of stakeholders to ensure that it is effective. Generally speaking, light-touch provisional liquidation has only been used in the context of cross-border restructurings, in support of main insolvency proceedings in another jurisdiction.

3.4 What are the effects of the commencement of formal restructuring proceedings, both for the debtor and for creditors?

If the debtor is subject to a restructuring under any of the procedures described above, the company can continue to trade while the relevant procedure is approved and implemented, subject to the terms of that arrangement. In each case, the directors can usually continue to carry on the debtor's business. However, as almost all restructurings are initiated as a result of concerns about insolvency, the directors are likely to owe duties to the company's creditors and must avoid taking steps that would prejudice creditors as a whole.

As there is no moratorium, creditors' rights will not be affected as a matter of law until after the approval of the arrangement, plan or scheme (at which point their rights will be formally compromised), so it is important for appropriate waivers to be sought where possible to ensure the effectiveness of the restructuring.

3.5 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?

No statutory stay or moratorium is available in a scheme, plan or arrangement; but any person that is bound by the terms of the scheme, plan or arrangement will be prevented from initiating any process against the company in breach of the terms of the scheme, plan or arrangement.

In a light-touch provisional liquidation, the court may grant an order staying any court proceeding that is already pending against the company in the BVI High Court (including any pending appeal); but there is no general moratorium against claims and nothing to prevent secured creditors from enforcing.

3.6 What process do restructuring proceedings typically follow (including likely length of process and key milestones)?

The processes for creditor arrangements, schemes and plans of arrangement are briefly summarised below. In all cases there will be a period of negotiation prior to the initiation of the formal process, the timeframe for which will vary significantly depending on:

• the value of the debt;
• the complexity of the issues; and
• the differences between the parties.

In each case, prior consultation with creditors and other stakeholders is essential to ensure success.

Creditors' arrangement: To initiate a company creditors' arrangement, the directors of the company must:

• appoint an interim supervisor; and
• approve the proposed arrangement.

The interim supervisor must then:

• convene a creditors' meeting to approve the arrangement within 28 days of his or her appointment; and
• in the meantime, report to creditors on the arrangement.

The creditors' meeting must also be advertised.

At the creditors' meeting, the arrangement will either be approved (by 75% or more by value of the creditors), amended or rejected; and there is provision for the meeting to be adjourned.

If the arrangement is approved, the Insolvency Act provides that the interim supervisor is appointed as supervisor and from that point, the arrangement is binding on the company and on each member and each creditor of the company. The act provides that any assets to which the arrangement relates must be placed "forthwith" in the possession of the supervisor, who is then responsible for ensuring that the relevant obligations are discharged in accordance with the arrangement.

As there is no need for court approval, the timeframe for implementing a company creditors' arrangement can be relatively short, provided that the arrangement is approved as proposed. The time it may take to complete the arrangement in accordance with its terms will vary greatly depending on:

• the nature of the arrangement; and
• the relevant debts.

Plan of arrangement: In a plan of arrangement, the directors of the company must first approve the plan of arrangement and then submit it for approval by the court.

At a hearing, the court:

• will consider the proposed plan and may amend it if it sees fit; and
• will rule on:
• • the persons that should be required to approve the plan; and
  • the requisite thresholds for such approval (these are not prescribed in the legislation, so this will be a matter of discretion).

The court may also direct that a further hearing be convened so that particular stakeholders can be heard.

Thereafter, the company must seek approval from stakeholders, if directed to do so by the court. If such approval is obtained, articles of arrangement must be filed with the company registry. The plan becomes effective once the articles of arrangement have been filed.

There is a limited statutory right of dissent, but the timeframes for exercising this are relatively short.

The timeframe for implementing a plan of arrangement will largely depend on the ability to convene the initial court hearing and seek the necessary approvals from members or creditors.

Scheme of arrangement: The proposing party (which can be the company, a creditor, a shareholder or a liquidator) must:

• make a proposal for the scheme; and
• apply to court for an order convening a meeting of each relevant class of creditors or members to approve the scheme.

The court must:

• decide whether to approve the convening of the meetings; and
• specify the timeframe within they must be held.

The meetings must then be convened in accordance with the court's direction. The scheme must be approved by a majority representing 75% in value of the creditors or class of creditors or shareholders or class of shareholders (as applicable).

If the scheme is approved, it must then be finally approved by the court at a further hearing, whereupon it will be binding as between the company and all members of the relevant class or classes of creditors and members, with no right of dissent. If a company is in liquidation, the arrangement will bind the liquidator and every person liable to contribute to the assets of the company on its liquidation.

Schemes can take longer to approve due to the need to convene:

• two court hearings; and
• the relevant class meetings.

Typically, the timeframe will be at least six to eight weeks from filing of the first application for approval or longer for more complex cases – particularly where there may be dissenting stakeholders.

3.7 What are the roles, rights and responsibilities of the following stakeholders in restructuring proceedings? (a) Debtor, (b) Directors of the debtor, (c) Shareholders of the debtor, (d) Secured creditors, (e) Unsecured creditors, (f) Employees, (g) Pension creditors, (h) Insolvency officeholder (if any), (i) Court.

(a) Debtor

The debtor typically initiates a restructuring proceeding by proposing a scheme or plan.

(b) Directors of the debtor

Directors will generally remain in control of the business during a restructuring; but if the company is insolvent or close to insolvency, they will need to exercise their duties in accordance with the interests of creditors. Directors may also be responsible for negotiating the restructuring, including managing conflicts of interest and competing stakeholder interests. In the case of a provisional liquidation, a protocol may be agreed and approved whereby the directors remain in control of the day-to-day affairs of the company, subject to the supervision of the provisional liquidator.

(c) Shareholders of the debtor

Where a company is insolvent or close to insolvency, shareholders will naturally have an interest in a successful restructuring which may preserve some value in the equity, but the primary stakeholders will be creditors and the shareholders will generally have a limited formal role.

(d) Secured creditors

As secured creditors have a continuing right of enforcement, their cooperation in any restructuring is usually vital and they will often have an effective veto.

(e) Unsecured creditors

Unsecured creditors will usually be asked to vote on and approve any restructuring proposal, so their role is important.

(f) Employees

Internationally, BVI companies are generally used as holding companies and it is therefore rare for those BVI companies to have employees; but to the extent that there are employees with preferential claims, their rights are usually not affected by arrangements, schemes or plans unless their express consent is obtained.

(g) Pension creditors

This is generally not a feature of BVI insolvencies, for the reasons above.

(h) Insolvency officeholder (if any)

In a creditors' arrangement, the supervisor takes responsibility for implementing the arrangement and will take possession of assets affected by it; but the supervisor does not assume overall responsibility for the company's ongoing business, which remains in the hands of the directors.

Unless the company is in liquidation, schemes and plans of arrangement do not require the appointment of an insolvency officeholder. However, it is not uncommon for a BVI insolvency practitioner to be appointed to the board of a debtor to assist with the supervision and implementation of a scheme of arrangement, and this may be a requirement imposed by senior creditors.

In the case of a provisional liquidation, the court has discretion as to the rights and powers that should be exercised by the provisional liquidator. It may be appropriate for the directors to continue to manage the company subject to the supervision of the provisional liquidator.

(i) Court

The role of the court varies. In schemes and plans, the court plays a key role in deciding in principle whether a scheme or plan should be put to the relevant class; and in the case of a scheme, the court retains a final discretion to approve. In contentious cases, the court may have to decide issues raised by dissenting creditors or other stakeholders; and in the case of a creditors' arrangement, the court will decide any challenges based on unfair prejudice.

3.8 Can restructuring proceedings be used to "cram down" and bind dissentient creditors to a transaction supported by other creditors? Are creditors separated into classes for the purposes of voting in the proceedings? What are the relevant voting thresholds? Is "cross-class cramdown" available?

Yes. The relevant voting threshold is 75% by value for creditors' arrangements and schemes of arrangement. There is no prescribed threshold for plans of arrangement, where voting thresholds are determined by the court.

While there is no express provision for cross-class cramdowns, the provisions relating to plans of arrangement are arguably broad enough to achieve the same result, subject to court approval.

3.9 Can restructuring proceedings be used to compromise secured debt?

Yes. Schemes and plans of arrangement are regularly used to reorganise and restructure secured debt, but secured creditors will have priority and senior secured lenders generally dictate the terms of any restructuring. Company creditors arrangements do not apply to secured debt, however.

3.10 Can contracts / leases be disclaimed or otherwise addressed through restructuring proceedings?

The legislative provisions relating to reorganisation procedures do not make express provision in relation to disclaiming existing contracts; but the terms of the scheme, plan or arrangement may well provide for the amendment, variation or termination of certain contracts and leases, subject to relevant class approval.

3.11 Can liabilities of third parties (e.g. guarantors) be released through restructuring proceedings?

The ability to release third-party liabilities in a scheme of arrangement is not expressly dealt with in the legislation, which refers to compromises between the company and its creditors. However, the equivalent legislation in England and the Cayman Islands has been interpreted as being sufficiently broad to encompass closely related third-party liabilities in appropriate cases; and while there is no BVI authority to confirm the point, the BVI courts will follow English and Cayman jurisprudence on this point. As such, the scheme jurisdiction can in appropriate cases be used to deal with guarantors and other closely related third parties so as to ensure the efficacy of the scheme. Issues of foreign law and the possibility of parallel schemes and/or assistance from foreign courts will need to be considered in the context of third-party liabilities.

In a recent decision, the BVI Commercial Court ruled that any third-party objections to a scheme should be raised at an early stage. As such, any relevant third parties should be given notice and will ordinarily be entitled to be heard on the initial court application so that any objections can be raised at that stage.

3.12 Is any protection and/or priority afforded to the providers of new money in the context of restructuring proceedings (i.e. is "DIP financing" available)?

DIP financing is not typically available in BVI restructurings. New money can be afforded priority only if existing secured lenders agree to subordinate.

3.13 How do restructuring proceedings conclude?

Schemes and plans generally come into effect following final approval and take place as a transaction, the completion of which may be subject to conditions subsequent. In the case of a creditors' arrangement, the arrangement will conclude when the supervisor has completed the arrangement in accordance with its terms and vacated office.

4 Insolvency

4.1 What types of insolvency proceeding are available in your jurisdiction, and what are the benefits and drawbacks of each?

Liquidation under the Insolvency Act is the only collective insolvency procedure that can be initiated against a company. The advantage of insolvent liquidation is that the application can be determined within a relatively short timeframe using a summary procedure which limits the scope for debtors to raise spurious objections unless the debt is genuinely disputed. The drawback is that liquidation is a final remedy which is intended to end the life of a company. It does not lend itself well to trading insolvencies or to company rescue.

4.2 How, by whom and on what grounds are insolvency proceedings initiated? Can the instigating party (or any other parties) select the identity of the relevant insolvency officeholder?

A creditor can appoint a liquidator of a debtor (which will commence the company's insolvent liquidation) by court order, following an application to the court and a hearing.

An application to court can be made by:

• the debtor itself;
• a creditor (including a judgment creditor);
• a shareholder;
• the supervisor of a company creditors' arrangement; and
• in limited circumstances, the attorney general or the Financial Services Commission.

While there is no strict requirement for the prior service of a statutory demand, where an application is being made by a creditor, the creditor should first serve a statutory demand on the debtor before issuing a liquidation application, unless there are good reasons for not doing so.

The court can appoint a liquidator in any of the following circumstances:

• The company is insolvent;
• In the court's opinion, it is just and equitable for a liquidator to be appointed; or
• In the court's opinion, it is in the public interest for a liquidator to be appointed.

A company is deemed to be insolvent under the Insolvency Act 2003 if:

• it fails to satisfy a valid statutory demand;
• execution or other process issued on a judgment, decree or order of the BVI court in favour of a creditor is returned wholly or partly unsatisfied; or
• either:
• • the value of the company's liabilities exceeds its assets (balance sheet insolvency); or
  • the company is unable to pay its debts as they fall due (cashflow insolvency).

Additionally, a company can appoint liquidators under the Insolvency Act by passing a special resolution (often requiring 75% approval of the company's members).

Once appointed, the liquidator has control and custody over the assets of the company. The directors remain in office but they cease to have any powers or duties, unless specifically authorised by the liquidator.

Once an insolvent liquidation is underway, there are no material differences to proceedings opened voluntarily or by court order. However, where a liquidator is appointed by a company's members under the Insolvency Act:

• the liquidator's powers are limited until after the first creditors' meeting has been held; and
• at the first creditors' meeting, unsecured creditors will have the opportunity to vote on the appointment of an alternative liquidator.

4.3 What are the effects of the commencement of insolvency proceedings, both for the debtor and for creditors?

A liquidator appointed to an insolvent company can continue to trade the company's business insofar as is necessary for its beneficial liquidation (in other words, to effect a better realisation for creditors, but not with a view to trading out of insolvency). Any costs or expenses incurred by the liquidator in carrying on the business will rank as an expense in the liquidation and will thus be paid out in priority to all other claims (other than secured claims).

Directors of BVI companies owe common law duties to act in the best interests of the company as a whole, which requires them to take account of the interests of the company's creditors ahead of those of the company's members when the company is insolvent or on the verge of insolvency. English authority, which the BVI court is likely to follow, suggests that a creditors' interest duty arises when the directors know, or should have known, that the company was or was likely to become insolvent. In this context, 'likely' meant probable.

4.4 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?

Following the appointment of a liquidator, there is a statutory moratorium on the commencement or continuation of claims against the company without the leave of the court. Any claims against the company after it enters liquidation must be made through the proof of debt process in the liquidation. However, a secured creditor is still permitted to enforce its security against the company.

The moratorium does not affect the right of secured creditors to enforce their security after the company enters insolvent liquidation, which is expressly preserved by the Insolvency Act.

4.5 What process do insolvency proceedings typically follow (including likely length of process and key milestones)?

After being appointed, the liquidator must convene a creditors' meeting and ask creditors whether they wish to form a creditors' committee. The liquidator must:

• investigate the affairs of the company and identify and get in its assets, which may require the bringing of claims; and
• report to creditors.

If recoveries are made, distributions can be made to creditors and upon completion of the liquidation, the company will be dissolved. There is no prescribed time limit for the procedure. Liquidations can last several years, if for example proceedings need to be brought by the liquidators in the British Virgin Islands or elsewhere; but equally, the process can be completed fairly quickly, depending on the circumstances.

4.6 What are the respective roles, rights and responsibilities of the following stakeholders during the insolvency proceedings? (a) Debtor, (b) Directors of the debtor, (c) Shareholders of the debtor, (d) Secured creditors, (e) Unsecured creditors, (f) Administrator, (g) Employees, (h) Pension creditors, (i) Insolvency officeholder, (j) Court.

(a) Debtor

On entering liquidation, the debtor comes under the control of the liquidator, who becomes the sole agent of the company.

(b) Directors of the debtor

During an insolvent liquidation, the directors and other officers of the company remain in office, but they cease to have any powers, functions or duties other than those:

• required or permitted under the Insolvency Act; or
• otherwise authorised by the liquidator.

In practice, the directors will usually cease to exercise all of their powers in a liquidation, but directors and officers are obliged to assist the liquidators and may be compelled to provide information to them.

A company's directors must cooperate with the liquidator – for example, by providing any of the company's books and records that may be in their possession, and they may be called upon to provide a statement of affairs, which is a sworn statement setting out information including the assets and liabilities of the company. The liquidator has fairly broad powers to compel the directors (and others) to provide certain types of information about the company and it is an offence to fail to comply with such a request.

(c) Shareholders of the debtor

In an insolvent liquidation, a company's shareholders generally play no significant role, as the purpose of the process is to return value to creditors. All decisions on behalf of the company are made by the liquidator in the interests of creditors as a whole. A shareholder may not claim in the liquidation of the company for a sum due to him or her in his or her character as a member, whether by way of dividend, profits, redemption proceeds or otherwise; but such sum is to be taken into account for the purposes of the final adjustment of the rights of members and, if appropriate, past members between themselves.

It is only in rare cases where the liquidator expects to realise sufficient assets to pay creditors in full that the interests of shareholders might fall to be considered by the liquidator.

As with directors, the liquidator has powers to compel the company's members to provide information concerning the company. Further, a member can be required to pay up any unpaid capital on any shares.

(d) Secured creditors

Insolvent liquidation does not impact on a secured creditor's right to enforce security and secured assets fall outside the liquidation estate. However, where the value of secured property is insufficient to repay secured debt, secured creditors may become involved in the liquidation process and they are entitled to claim in the liquidation by:

• valuing their security and claiming as an unsecured creditor for the balance; or
• surrendering their security altogether and claiming as an unsecured creditor for the whole of their debt.

(e) Unsecured creditors

The liquidator must convene a creditors' meeting within 21 days of his or her appointment, although this can be dispensed with if:

• the liquidator considers it appropriate to do so; and
• the creditors do not require him or her to convene a meeting.

At the first creditors' meeting, creditors may vote to appoint an alternative liquidator.

The liquidator must file a report within 60 days of appointment and send this to the creditors. A final report must also be filed upon completion of the liquidation. While there are no strict requirements to do so, liquidators may well report periodically to:

• creditors as the liquidation progresses; and/or
• any creditors' committee that is established pursuant to a resolution of the creditors at the first meeting.

Typically, a report is also given to creditors and/or any creditors' committee when the liquidator seeks approval for their fees and expenses.

A creditors' committee may be established:

• at the first meeting of creditors; or
• at any time, by creditors' resolution.

The committee's functions include:

• consulting with the liquidator generally in relation to the winding up of the company;
• approving remuneration and expenses; and
• calling creditors' meetings.

The creditors' committee can:

• require the liquidator to provide information and reports; and
• summon the liquidator to appear before it.

However, generally speaking, it cannot give directions to the liquidator.

As such, the creditors' committee acts primarily as a consultative body with limited powers to control the course of the liquidation.

Creditors must submit a claim in the liquidation which will be adjudicated by the liquidator before making a distribution.

(f) Administrator

Administration is not a procedure available in the British Virgin Islands.

(g) Employees

Employees may be retained by the liquidators if required and paid as an expense of the liquidation, and are preferential creditors in respect of claims for unpaid wages; but it is rare for BVI companies to have employees, as most are used as holding companies.

(h) Pension creditors

Pension contributions payable during the 12 months preceding the commencement of the liquidation by the debtor in its capacity as an employer are regarded as preferential claims, and so pension creditors enjoy preferential status; but this is not a common feature of BVI insolvency.

(i) Insolvency officeholder

From the date of their appointment, the liquidator has custody and control of the company's assets and is responsible for getting in the company's assets and distributing them to creditors. He or she must:

• investigate the company's assets and liabilities;
• report to creditors;
• call creditors' meetings;
• adjudicate claims; and
• generally wind up the company's affairs in accordance with the powers and duties set out in the Insolvency Act.

In particular, they have powers to demand information and cooperation from the company's former directors and officers.

(j) Court

The liquidator is an officer of the court and is:

• entitled to seek directions from the court in the case of certain decisions which are likely to be controversial; and
• obliged to seek sanction before taking particular actions such as bringing or discontinuing claims.

The court generally has power to:

• approve the liquidator's fees and expenses; and
• grant his or her discharge upon completion of the liquidation.

The court may also be asked to determine:

• claims brought by a creditor challenging a liquidator's decision; and
• claims brought by a liquidator against former directors or officers.

4.7 What is the process for filing claims in the insolvency proceedings?

The liquidator will:

• give notice of the appointment to any known creditors; and
• advertise such an appointment.

Any creditor wishing to participate in the initial meeting of creditors and to be considered for a seat on any creditors' committee must submit a claim in the liquidation.

The liquidator will admit or reject the claim. This is initially done on a provisional basis for the purpose of voting. It is only when the liquidator has assets to distribute that he or she is obliged to formally adjudicate creditors' claims. If a creditor is dissatisfied with the decision on adjudication, it may make an application to court under Section 273 of the Insolvency Act 2003 to challenge that decision.

4.8 How are claims ranked in the insolvency proceedings? Do any claims have "super priority" and is there scope for subordination by operation of law (e.g. equitable subordination)?

Section 207 of the Insolvency Act sets out the prescribed priority for payments out of the assets as follows:

• in priority to all other claims, the costs and expenses properly incurred in the liquidation in accordance with the prescribed priority;
• after payment of the costs and expenses of the liquidation, the preferential claims admitted by the liquidator in accordance with the provisions for the payment of preferential claims prescribed;
• payment of the preferential claims, all other claims admitted by the liquidator; and
• after paying all admitted claims, any interest payable.

Unsecured claims rank equally between themselves and are paid out on the pari passu principle. Any surplus assets remaining after payment of any interest will be distributed to the shareholders in accordance with their rights and interests in the company.

The following qualify as preferential debts:

• employees' wages, salaries and holiday pay;
• amounts due by the debtor to the BVI Social Security Board;
• amounts due by the debtor in respect of pension contributions and medical insurance;
• sums due to the government regarding any tax, duty, including stamp duty, licence fee or permit; and
• sums due to the Financial Services Commission in respect of any fee or penalty.

Secured creditors can enforce their security rights at any time after the appointment of liquidators and any secured assets fall outside the liquidation estate.

Subordination of debt is expressly permitted by Section 151 of the Insolvency Act, which provides that:

4.9 What is the effect of insolvency proceedings on existing contracts? Is the counterparty free to terminate? Can they be disclaimed?

The commencement of liquidation does not affect existing contracts by operation of law, but the liquidator has a power to disclaim an unprofitable contract into which the company has entered by filing a notice of disclaimer with the court under Section 217 of the Insolvency Act. In many cases, however, contracts will include express termination provisions in contemplation of either party's insolvency.

A contractual counterparty may apply to the court under Section 229 of the Insolvency Act for an order rescinding the contract on such terms as to payment between the company and the counterparty of damages for non-performance as the court may think fit. If a counterparty is awarded damages, these may be claimed as an unsecured debt in the liquidation. No contractual counterparty may commence or proceed with any proceedings against the company without the permission of the court (although such claims can be pursued through the proof of debt procedure).

4.10 Can transactions entered into by the debtor prior to be insolvency be challenged and set aside? What are the relevant grounds / look-back periods / defences?

The main 'voidable' transactions in the British Virgin Islands that can be annulled or set aside are:

• unfair preferences;
• transactions at undervalue;
• voidable floating charges; and
• extortionate credit transactions.

These transactions can be clawed back upon a successful application by the liquidator only.

The relevant transaction must have been entered into in the 'vulnerability period' (generally six months before the onset of insolvency if the person is unconnected to the company or two years if the transaction is with a connected person).

4.11 How do the insolvency proceedings conclude? Can any liabilities survive the insolvency proceedings?

The liquidator pays distributions from available assets among unsecured creditors whose claims are admitted on a pari passu basis. Before making a distribution, the liquidator issues a notice stating the intention to distribute. If a creditor does not submit a claim by the specified in the notice date, the liquidator will exclude this creditor from the distribution. Claims will be subject to final adjudication (eg, admittance in part or in whole, or rejection) by the liquidator only when there are available funds to distribute.

Liquidators may make interim distributions as the liquidation progresses, with a final distribution prior to completion of the liquidation.

Upon conclusion of the liquidation, the liquidator must prepare a final report and serve it on every creditor of the company whose claim has been admitted and all shareholders of the company. That report must also be filed with the BVI company registrar (but such reports are not generally publicly available). The liquidator will then apply to court to be released from their appointment. The company is then dissolved and ceases to exist from that point. As such, following completion of the liquidation all assets and liabilities will have been resolved completely and will not survive the process.

5 Cross-border / Groups

5.1 Can foreign debtors avail of the restructuring and insolvency regime in your jurisdiction?

In limited and generally exceptional circumstances, the BVI court can appoint liquidators over a foreign company if a close connection to the jurisdiction can be established. However, it is unlikely that such a procedure would be initiated by the debtor.

The light-touch provisional liquidation process has been used in conjunction with cross-border restructurings, but there is no established practice of companies migrating to the BVI to avail themselves of that or any other restructuring process.

5.2 Has the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments been adopted or is it under consideration in your country?

Part XVIII of the Insolvency Act 2003 adopts the UNCITRAL Model Law; however, this part has not been brought into force.

5.3 Under what conditions will the courts in your jurisdiction recognise and/or give effect to foreign insolvency or restructuring proceedings or otherwise grant assistance in the context of such proceedings?

Part XIX of the Insolvency Act provides a basic statutory framework for judicial 'assistance' to be provided to insolvency officeholders from certain designated countries. In 2024 the list of designated countries was expanded and now comprises: – :

• Australia
• Bahamas*
• Barbados*
• Belize*
• Bermuda*
• Canada
• Cayman Islands*
• Finland
• Guernsey*
• Guyana*
• Hong Kong
• Ireland*
• Isle of Man*
• Jamaica*
• Japan
• Jersey
• Member States and Territories within the Organisation of Eastern Caribbean States (the OECS, comprising Anguilla, Antigua and Barbuda, Dominica, Grenada, Guadeloupe, Martinique, Montserrat, Saint Kitts and Nevis, Saint Lucia, and Saint Vincent and the Grenadines)*
• New Zealand
• Nigeria*
• Singapore*
• Trinidad and Tobago*
• Turks and Caicos Islands*
• United Kingdom
• United States of America

(* denotes countries newly designated in 2024)

Assistance is not equivalent to Model Law recognition and only provides the ability to apply for relief from the BVI court on an application-by-application basis.

Additionally, officeholders from non-designated countries can seek limited common law recognition in the British Virgin Islands, but in recent years the scope of common law recognition has been substantially scaled back. In particular, the Eastern Caribbean Court of Appeal has held that common law 'recognition' does not confer any rights to 'assistance' from the BVI court.

Accordingly, the most effective way to ensure full control across jurisdictions in a cross-border insolvency is for the foreign officeholder to seek to be appointed, where possible, in the British Virgin Islands, on a joint basis with a BVI insolvency practitioner.

5.4 To what extent will the courts cooperate with their counterparts in other jurisdictions in the case of cross-border insolvency or restructuring proceedings?

In 2017, the British Virgin Islands adopted the Judicial Insolvency Network's (JIN) cross-border cooperation guidelines that are designed to increase communication and cooperation between:

• courts;
• insolvency practitioners; and
• other parties in international insolvencies and restructurings.

The JIN guidelines have been adopted by the courts of 18 countries and territories; an up-to-date list is available at https://www.jin-global.org/jin-guidelines.html.

Joint court hearings are possible in theory pursuant to the JIN guidelines.

5.5 How are corporate groups treated in the context of restructuring and insolvency proceedings? If there is no concept of a group proceeding (or consolidation), is there any regime through which insolvency officeholders must / may cooperate?

The assets and liabilities of each company in a group will be treated separately for the purposes of insolvency and any insolvency or restructuring proceedings. The liquidator of a parent company in a group will usually be able to assert control over the group by voting shares to appoint directors of subsidiaries. Where the entire group of companies is insolvent, the same liquidator may be appointed over all of them, and the BVI court may case manage the proceedings together to ensure that a holistic approach is taken. In some cases where companies are closely connected, the court may approve a 'pooling' arrangement enabling a liquidator of two or more companies to manage those liquidations as one, but such arrangements will only be considered where the specific circumstances justify a departure from the default rule that each company is to be treated as having separate legal personality.

The JIN guidelines are designed to facilitate cooperation in cross-border restructuring and insolvency scenarios. Generally, the BVI courts recognise the role of the BVI as an international financial centre and will do their best to observe principles of comity in cross-border cases, albeit within the increasingly narrow confines of common law 'modified universalism' and against a backdrop where the UNCITRAL Model Law remains to be implemented.

5.6 Is your country considering adoption of the UNCITRAL Model Law on Enterprise Group Insolvency?

Not currently.

5.7 How is the debtor's centre of main interests determined in your jurisdiction?

The concept of centre of main interests of a debtor company or group of companies does not directly apply in the BVI.

In the context of an application to wind up a foreign company in the British Virgin Islands, the Insolvency Act 2003 provides that a foreign company will be considered to be sufficiently connected to the British Virgin Islands if:

• it has or appears to have assets in the British Virgin Islands;
• it is carrying on, or has carried on, business in the British Virgin Islands; or
• there is a reasonable prospect that the appointment of a liquidator of the company will benefit the creditors of the company.

5.8 How are foreign creditors treated in restructuring and insolvency proceedings in your jurisdiction?

With the exception of preferential creditors (the majority of which are likely to be resident in the British Virgin Islands):

• foreign creditors are not treated any differently from domestic creditors; and
• there are no special procedures that foreign creditors must comply with when submitting claims in BVI insolvency proceedings.

6 Liability risk

6.1 What duties do the directors of the debtor have when the company is in the "zone of insolvency" (or actually insolvent)? Do they have an obligation to commence insolvency proceedings at any particular time?

Directors of BVI companies owe common law duties to act in the best interests of the company as a whole, which requires them to take account of the interests of the company's creditors ahead of those of the company's members when the company is insolvent or on the verge of insolvency. English authority, which the BVI court is likely to follow, suggests that a creditors' interest duty arises when the directors know, or should have known, that the company was or was likely to become insolvent. In this context, 'likely' meant probable.

6.2 Are there any circumstances in which the directors could incur personal liability in the context of a debtor's insolvency?

Part IX of the Insolvency Act deals with the principal ways in which a director may be ordered to provide compensation or otherwise contribute assets to an insolvent company.

If a director or officer of a company in liquidation has misapplied or retained or become accountable for any money of the company, or is guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company, the court can make orders that such person repay, restore or account for money or assets or any part thereof to the company, as compensation for the misfeasance or breach of duty. A 'misfeasance' claim can be brought by the company 'pre-insolvency' or after the company has entered into liquidation by a liquidator.

A claim can also be brought against a director for:

• insolvent trading (where the director knew or ought to have concluded that there was no reasonable prospect that the company could avoid going into insolvent liquidation, but continued to trade); or
• fraudulent trading.

If found liable, the director can be ordered to make such contribution to the assets of the company as the court considers proper.

Directors can also be liable if they cause a company to make distributions when the company is insolvent.

6.3 Is there any scope for any other party to incur liability in the context of a debtor's insolvency (e.g. lender or shareholder liability)?

Shareholders are not generally liable for a company's liabilities. However, there are specific provisions that may make a shareholder liable to repay a dividend that was paid at a time when the company was insolvent or caused the company to become insolvent, and a liquidator of a company may be able to assert a claim against the shareholder in that regard.

A lender is unlikely to incur liability in the context of a debtor's insolvency save to the extent that it is implicated in:

• a voidable transaction; and/or
• a claim for fraudulent trading (which can be brought against third parties).

More generally, the Conveyancing Law of Property Act 1961 includes a provision whereby a 'transaction defrauding creditors' can be declared void, whether or not the company in question is insolvent or in liquidation. Such a claim could be brought by a liquidator on behalf of a company and the target could be a former lender or shareholder.

7 The Covid-19 pandemic

7.1 Did your country make any changes to its restructuring or insolvency laws in response to the Covid-19 pandemic? If so, what changes were made, what is their effect and are they temporary or permanent?

The British Virgin Islands did not suspend any insolvency law provisions in light of the Covid-19 pandemic, unlike some other jurisdictions. However, the BVI courts quickly adopted remote hearings by Zoom, ensuring that insolvency-related proceedings could continue throughout the pandemic.

8 Other

8.1 Is it possible to effect a "pre-pack" sale of assets, and is it possible to sell the assets free and clear of security, in restructuring and insolvency proceedings in your jurisdiction?

Generally speaking, a 'pre-pack' sale of assets is not possible under the existing BVI legislation without the buy-in of all relevant stakeholders. Similar results might be achievable through a scheme or plan of arrangement, but those mechanisms do not benefit from a protective moratorium.

8.2 Is "credit bidding" permitted?

There is no prohibition against credit bidding in the context of a sale of secured assets. Credit bidding for assets in an insolvent liquidation may be more problematic due to the fundamental principle that creditors are treated on a pari passu basis and where liquidators are obliged to act in the interests of creditors as a whole.

9 Trends and predictions

9.1 How would you describe the current restructuring and insolvency landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Arbitration and insolvency: In a recent decision on appeal from the BVI Commercial Court, the Privy Council issued a landmark ruling concerning the interplay between arbitration and insolvency proceedings. The Privy Council departed from the previously orthodox Salford Estates approach, holding that a liquidation application should not be automatically stayed simply because the underlying debt is subject to an arbitration agreement. Instead, the court must determine whether the debt is genuinely disputed on substantial grounds. If it is not, the application can proceed, as insolvency proceedings do not seek to resolve disputes but rather determine the company's solvency.

The decision is arguably less groundbreaking in the British Virgin Islands itself, as the BVI courts departed from the Salford Estates approach some years ago; but the decision provides helpful confirmation that:

• the approach adopted by the BVI courts is correct as a matter of common law; and
• the existence of an arbitration agreement is not in itself sufficient to displace the court's winding up jurisdiction.

Insolvency Act 2003: The Insolvency Act 2003 is under general review by the government of the British Virgin Islands. At present, the administration procedure under Part III of the Insolvency Act, which is based on the United Kingdom's pre-Enterprise Act administration regime, is not yet in force. A review is being undertaken as to whether the introduction of such provisions is appropriate in the jurisdiction. The prevailing consensus at the present time is that the UNCITRAL Model Law on Cross-Border Insolvency provisions (allowing for further international cooperation) are unlikely to be brought into force. However, the recent expansion of the list of designated countries under Part XIX from 9 to more than 24 countries and territories means that statutory assistance can now be offered to a wider range of foreign office holders internationally.

Changes to the Business Companies Act with effect from 1 January 2023 have changed the regime for the striking off and dissolution of companies that have fallen into penalty by failing to pay registry fees. Previously, such companies would be struck off but generally remain in existence for a period of several years prior to dissolution. Under the new regime, dissolution takes effect almost immediately after striking off and the legislation says nothing about whether such companies can be subject to a liquidation application prior to their restoration. The knock-on effect of these changes has been to introduce an element of uncertainty surrounding the ability of creditors to apply to appoint liquidators where the debtor company has been struck off and dissolved. The courts have grappled with a number of liquidation applications relating to dissolved companies and considered whether a separate application must be made by the creditor to restore the company to the register prior to applying for the appointment of liquidators. The prevailing view is that the new legislation fails to deal with the situation adequately. A consultation is currently underway to further amend the legislation to address this issue.

10 Tips and traps

10.1 What are your top tips for a smooth restructuring and what potential sticking points would you highlight?

Aside from the general advice that applies in any restructuring, in the context of the British Virgin Islands (and other offshore jurisdictions), it is important to seek local law advice at an early stage of the process. There can be an assumption that the legal and procedural framework for restructurings in the British Virgin Islands is the same as that in other common law countries, but in reality the BVI framework for insolvency and restructuring borrows partly from English law and also from US law and other commonwealth jurisdictions, as well as having some unique features. As a result, some of the procedures available may be unfamiliar to overseas practitioners. It is not uncommon for onshore advisers to make assumptions about the legal landscape for restructuring and insolvency in offshore jurisdictions such as the British Virgin Islands and leave it until later in the process before properly considering how any offshore elements may tie in with a wider cross-border restructuring. That can lead to unexpected delays or a need to rethink strategy at a late stage.

It is particularly important to factor in practical issues such as:

• the time that may be required to seek court approval and class approval for plans and schemes; and
• the potential for stakeholders to dissent or object.

Again, taking local law advice at an early stage is essential.

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.