1 Legal framework
1.1 What domestic legislation governs restructuring and insolvency matters in your jurisdiction?
The domestic legislation governing restructuring and insolvency in the British Virgin Islands, as an overseas British territory, is essentially based on the same legal principles as England and Wales (hereinafter referred to as ‘England'). The Insolvency Act 2003 and the Insolvency Rules 2005 – together with various amendments and supplementary pieces of law, such as the Insolvency Code of Practice and the Insolvency Practitioners Regulations – are the key pieces of legislation governing insolvency. However, there are other procedures that also typically fall within the remit of insolvency/restructuring, such as solvent liquidations; while corporate governance measures, including the formation and management of entities, are governed by the Business Companies Act 2004 and the Partnership Act 1996.
The fundamental values of the BVI insolvency regime mirror those of the English system. The key principles are:
- the ‘pari passu' equal treatment of creditors of the same nature;
- the ‘class remedy', resulting in fair treatment and avoiding a ‘run on assets' that may favour those who were sufficiently in the know – or just lucky enough – to get paid first; and
- the protection of secured creditors' rights even in the event of insolvency, such that security is maintained (subject to challengeable transactions that may be voided against a liquidator), as well as the ability to enforce over secured assets and vote/prove as a secured creditor – which distinguishes their position from ordinary unsecured creditors.
The BVI system is tried, tested and flexible. It is supported by the well-developed legal system of the Eastern Caribbean Supreme Court (ECSC), which also upholds decisions of the UK courts, as it shares the final appellate court of the Privy Council.
The suite of insolvency and corporate legislation is complemented by a range of other laws, which sometimes touch upon the insolvency regime. These include banking law, anti-money laundering legislation, the Civil Procedural Rules and more recently a new law that introduced increased substance requirements for BVI-resident legal entities – the Economic Substance (Companies and Partnerships) Act 2018.
1.2 What international / cross-border instruments relating to restructuring and insolvency have effect in your jurisdiction?
The Insolvency Act has provisions that govern cross-border assistance and incorporates the UNCITRAL Model Law.
Part XIX empowers the BVI courts to make orders in respect of foreign proceedings in certain designated territories/countries (Australia, Canada, Finland, Hong Kong, Japan, Jersey, New Zealand, the United Kingdom and the United States).
These powers include:
- facilitating the coordination of BVI and foreign insolvency proceedings;
- granting a stay of execution against debtor property in the British Virgin Islands; and
- delivering up property to the foreign representative.
When choosing to apply these provisions, the BVI court must give due consideration to:
- the fair treatment of stakeholders in the foreign proceedings;
- the protection of parties in the British Virgin Islands that have a claim against the debtor; and
- the principle that the distributions in the foreign proceedings must be substantially aligned with the expected distribution waterfall under the BVI proceedings.
Fundamentally, this part contains an express provision that the assistance afforded by the BVI court cannot interfere with the rights of a secured creditor under its security.
The assistance available is therefore broad and flexible – particularly as the BVI court can choose to apply the law of the British Virgin Islands or that of the foreign proceedings.
Part XVIII contains provisions based on the UNCITRAL Model Law, but this has not yet been brought into force.
The interplay between Parts XIX and XVII and the relevant common law principles has been considered in a number of cases. The current position is that Part XIX should be applied and a general common law right does not override the statutory provisions, thus creating a lacuna for those non-relevant foreign countries that do not have a statutory right to apply for assistance. This situation is said to be under review.
1.3 Do any special regimes apply in specific sectors?
Technically, no special regimes for specific sectors or groups of companies are applicable in the British Virgin Islands.
As expected from a legal system based on the English Insolvency Act 1986, there have been modifications in relation to insurance companies and the netting of financial contracts arrangements, similar to those introduced in the United Kingdom.
The British Virgin Islands is said to be open to ‘special regimes', in the sense that the jurisdiction supports a wide range of businesses and has modified its offering to accommodate changes over time.
The advantages of incorporating in the British Virgin Islands are broad. Known as a ‘mass incorporation' jurisdiction – offering tax neutrality, foreign exchange efficiency and a well-developed legal system – the British Virgin Islands is said to be adaptable to the modern business environment. Many types of structures with global reach often have a BVI link. Typically, holding companies or special purpose vehicles are incorporated, with parent companies elsewhere offshore and onshore operating subsidiaries lower down in the structure.
The Financial Service Commission is the cornerstone of the BVI financial sector, with divisions responsible for licensing, regulation and ongoing monitoring of insolvency practitioners, insurance companies, banking and trust licensees, and others.
Due to its location in the Northeast Caribbean, the British Virgin Islands has long been a preferred destination for sailors. The Virgin Islands Shipping Registry has over 3,000 internationally owned vessels registered, which are governed by the BVI Merchant Shipping Act 2001.
In addition, the British Virgin Islands is well known for trust, estate and succession planning, as well as being a major jurisdiction for regulated investment funds. It is home to respected experts and has the necessary regulatory and legal framework required to support these business offerings.
The British Virgin Islands has no specific specialism in the same way that the Cayman Islands is best known for investment funds and Bermuda is linked to insurance products. However, this is not necessarily a bad thing – as is evident from the advance of blockchain technologies and cryptocurrencies. Through its recognition of bitcoin and ether-focused funds, the British Virgin Islands has shown that it is dynamic and can adapt to changing global market trends. The BVI government has also stated its intention to establish a regulatory framework that is supportive of these emerging technology sectors. The British Virgin Islands has thus become a leading jurisdiction for fintech companies when considering where to domicile their funds.
1.4 Is the restructuring and insolvency regime in your jurisdiction perceived to be more creditor friendly or debtor friendly?
The legislative framework provides for a number of insolvency options and procedures: liquidation, creditors' arrangements, receivership, administrative receivership and administration (although the provisions on administrations have not yet been brought into force). The availability of these procedures, however, does not necessarily equate to their utilisation. Liquidations are the most common insolvency procedure in the British Virgin Islands – albeit that in recent years, receiverships have become increasingly prevalent. Due to the absence of administration or an analogous procedure to US Chapter 11 and the protections afforded to creditors on the commencement of insolvency, the British Virgin Islands is seen as a ‘creditor-friendly' jurisdiction. In reality, there are measures to protect all stakeholders when a debtor faces insolvency; but the frequency with which liquidations arise creates a manifest perception of a ‘creditor-friendly' regime.
Of course, the legislative framework is not the only factor to consider; the court's willingness to grant relief (eg, interim relief), developing jurisprudence regarding the lesser-used procedures and openness to change and reform could change this view of the BVI regime. One example of a possible shift towards a more debtor-friendly approach was Constellations Overseas Limited (BVIHC (Com) 2018/0206-2012), in which BVI provisional liquidators were appointed to support a group restructuring that was taking place in Brazil via judicial reorganisation. The application of very wide common law jurisdiction and reliance on persuasive authority to use provisional liquidation to support a foreign restructuring process mean that the range of procedures available in the British Virgin Islands has increased and opportunities to assist cross-border restructurings have expanded.
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 British Virgin Islands has an independent legal and judicial system that is fundamentally based on the English legal system and common law. The highest appellate court is the Privy Council, so the outcome of legal disputes is said to be relatively predictable. The legal regime relating to insolvency and restructuring is thus constantly developing, because of the common law system and decisions of the Judicial Committee of the Privy Council. Binding and persuasive judgments are considered by the judges in the ECSC system, meaning that the British Virgin Islands is adaptive to modern changes through the application of legal precedents.
All domestic matters are legislated within the British Virgin Islands by the Legislative Council. New laws and regulations are often developed and drafted in consultation with industry experts and advisers from the private sector.
The constitution of the BVI judiciary is the ECSC, colloquially known as the High Court, which is a court of unlimited jurisdiction. There is currently one sitting judge, Her Ladyship the Honourable Justice Vicki-Ann Ellis, who has presided since 2012.
The Commercial Division of the Supreme Court is typically where most insolvency cases are heard; it can hear cases from any of the nine Eastern Caribbean member states. In October 2019 the British Virgin Islands welcomed the return of Justice Gerhard Wallbank to the Commercial Court for a period of three years. This will further support the continuity of case management and efficient supervision and administration of insolvency cases in the jurisdiction.
2.1 What principal forms of security interest are taken over assets in your jurisdiction?
The most common forms of security over immovable property available in the British Virgin Islands are mortgages, equitable fixed charges and floating charges. Forms of security available over movable property include floating charges, equitable mortgages or charges, and pledges.
A mortgage can be a legal or equitable mortgage. The difference is that in the latter instance, the requirements of a legal mortgage under the relevant legislation may not have been met; but typically, if a dispute arises and the court can find all of the basic elements of a mortgage, it will usually find a mortgage to be in place under equity and treat it as a mortgage under law.
A charge does not transfer title to the asset or give a right of possession to the lender. It does, however, give the lender the right to enforce on the asset in the event of default. The lending documentation often includes an explicit right to sell the asset in certain circumstances and may prevent the debtor from disposing of the asset without the consent of the lender. However, a distinguishing factor from a mortgage is the lack of a right of possession. A lender can become a mortgagee in possession, but a fixed charge holder can typically only take control of the asset in order to sell it.
Floating charges are distinguished from fixed charges in the sense that the asset being charged need not be specifically ascertained; nor does the lender need to be able to control the asset. Floating charges are therefore more flexible and can be granted over all property of a debtor. Floating charges do not prohibit a debtor from disposing of assets, unless the floating charge has crystallised, at which point the assets of the company will become effectively fixed (in terms of value) and the debtor will lose the ability to use those assets in the ordinary course of business.
A pledge is a bailment that conveys possessory title to property owned by a debtor (the pledgor) to a creditor (the pledgee), to secure repayment for some debt or obligation and to the mutual benefit of both parties. A pledge will need to be registered in the same manner as other charges.
2.2 How can those security interests be enforced (and what factors could complicate or prevent this process)?
In the case of a mortgage (legal or equitable), the title to the asset in question is transferred to the mortgagor upon granting the mortgage, with a right to re-convey title once the debt is satisfied. This can be a pure title transfer or transfer under a deed, whereby a charge is created by way of a mortgage providing the lender with an interest in the asset, which can be enforced upon default by the debtor.
Where a mortgage or charge is created over land, it must be created by deed, evidenced in writing and signed by the debtor.
The land register is operated by the government of the Virgin Islands and is a public register where land ownership can be ascertained and property transactions can be registered.
The BVI Registry of Corporate Affairs is maintained by the BVI Financial Services Commission and limited corporate documents are available to the public. Charges are registered with the registry; and while there is no legal obligation to register charges, if a dispute arises, the determination of priority will be considered in light of the public register. Therefore, lenders are advised to ensure that public filing is a condition of the lending agreement.
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?
While the British Virgin Islands is not known as a debtor-friendly jurisdiction, debt restructuring and informal workouts are available. The relevant procedure will be governed by the security documentation and any agreements between the debtor and its creditors.
In light of the corporate structures that are common in the British Virgin Islands, the BVI entity is rarely the kingpin of the group and will more often be a guarantor rather than principal debtor; so BVI procedures may be needed, but typically will be ancillary to the main workout/restructuring happening elsewhere. They will nonetheless be critical if the BVI entity must remain in the group.
Informal procedures may be bolstered by protections afforded by formal insolvency procedures, such as a stay on action from a provisional liquidation. We have recently seen this in action in Constellations Overseas Limited (BVIHC (Com) 2018/0206-2012), in which a provisional liquidation was used in the British Virgin Islands to support restructuring efforts taking place in Brazil, where the operational entities were undergoing a judicial restructuring.
Informal procedures have the advantage of being private; whereas judicial procedures will be in the public domain due to searchable court files, service requirements and publicised rulings – unless, of course, the advocates can persuade the judge that the matter should be sealed.
Informal negotiations can also be more flexible and dynamic, adapting to the needs of the business and various stakeholders. Formal procedures are prescriptive and must be complied with to the letter of the law, which can result in higher costs and a longer process. However, the advantage of formal procedures is the expertise and independence of an insolvency office holder, who acts in the interests of all parties. Informal procedures can exert a squeeze on less influential stakeholders, leaving certain parties disenfranchised in the process. Keeping key parties ‘happy' can therefore be an essential objective of the informal workout, to ensure the success and continuity of the business going forward.
3.2 What formal restructuring proceedings are available in your jurisdiction, and what are the benefits and drawbacks of each?
The BVI government has not yet brought into force the administration provisions of the Insolvency Act, so there is a missing piece in terms of the traditional well-known ‘rescue procedure'. However, a number of restructuring tools are nonetheless available:
- the scheme or plan of arrangement derived from the BVI Business Companies Act 2004 and the International Business Companies Act 1984; and
- a true insolvency procedure in the form of the creditors' arrangement (similar to a UK creditors' voluntary arrangement and with analogous qualities to the Chapter 11 procedure in the United States).
The fundamental principle of the scheme, plan and/or arrangement is for a debtor to agree some form of compromise with its creditors and/or members. This can be helpful in the event of economic difficulties, cash-flow pressures, consolidations, mergers or demergers, as well as in a variety of other situations.
A scheme or plan involves judicial oversight at various points and the court will give directions as to how the process develops. Minority or dissenting stakeholders have the power to block progress; however, majority stakeholders in favour can veto the minority interests, subject to the court's approval. Minority stakeholders are protected by the right to be treated fairly and in the case of schemes will be treated as a class – so despite dissenting, they will receive the same proportional outcome as the rest of their class.
However, the creditors' arrangement does not feature court involvement – a key difference (and disadvantage) from the UK creditors' voluntary arrangement and US Chapter 11 proceedings. This lack of judicial oversight means that there is no moratorium to protect against creditor action, putting the arrangement itself and underlying business at risk while negotiations take place.
Creditors that are involved and receive notice are bound by the terms of the arrangement, but
negotiations for reorganisation can be complex and protracted; therefore, the lack of moratorium in these proceedings means that they are rarely used in practice.
3.3 How, by whom and on what grounds are formal restructuring proceedings initiated? What are the main preconditions for success?
Under the Business Companies Act, a scheme may be commenced by the debtor, a creditor, a member, a liquidator (solvent or insolvent) or an administrator (although this section of the act has not yet been brought into force).
A plan must be proposed by the directors, if they decide that the proposal is in the best interests of the company (the members or creditors, depending on which groups of stakeholders the plan affects).
Whereas a creditors' arrangement can be proposed by any party, in practice it needs the support of the debtor and its directors, so that sufficient information can be accessed to make the proposal viable and ensure that there is no unfair prejudice. Otherwise, the arrangement will not be approved, may be successfully challenged or ultimately will not succeed. It also must be supported by the insolvency practitioner who is appointed to oversee the arrangement.
As with most voluntary restructurings, the key condition of a successful outcome (in terms of getting the arrangement approved and successfully completing it) is typically the viability of the underlying businesses; otherwise, the failure of the debtor is merely being deferred. If debt forgiveness or a debt reschedule is proposed, a critical factor of success will be sufficient cash flow and liquidity during the grace period.
Another condition for success is open and honest engagement with advisers and stakeholders, with sufficient information released to allow the parties to make informed decisions. This is especially important where a creditor arrangement proposes the appointment of an insolvency practitioner such as an interim supervisor, as the interim supervisor must prepare a report on the proposal for the creditors and monitor the affairs of the debtor during the proposal period.
3.4 What are the effects of the commencement of formal restructuring proceedings, both for the debtor and for creditors?
The debtor should, in theory, be able to continue on a business as usual basis, subject to compliance with the terms of the proceedings – be they making reduced or delayed payments, or no payments in the event that a complete debt write-off has been agreed. Provisions may restrict new debt or provide for cost-cutting measures, and a variety of obligations may be imposed on the debtor, depending on the circumstances underlying the reorganisation.
In respect of a scheme, plan and/or arrangement, the effect of approval (and sanction, if applicable) is that the parties are bound by the terms (and directions of the court, if applicable), and must comply with those terms for the duration of the process.
A scheme, for example, will bind all stakeholders – even those that dissented. In respect of a plan, dissenting minority parties have a legal right to be paid fair value for their shares. In an arrangement, even parties that did not receive notice of the creditors' meeting and arrangement will be bound by the terms (subject to procedural rules and a right of challenge based on unfair prejudice).
Secured and preferential creditors' rights are not affected by an arrangement, and must be guaranteed a return equal to what it would they would have received had the debtor gone into liquidation at the time the arrangement was approved.
3.5 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?
Once the procedure is approved, a moratorium will apply, although not until it has been agreed.
All stakeholders are bound by the terms – even dissenting creditors, but only in the absence of any procedural impropriety; and dissenting stakeholders also have a right of veto if there is unfair prejudice.
The lack of moratorium prior to approval is the key drawback of BVI restructuring procedures. The lack of protection afforded to the debtor against creditor enforcement while the terms of the restructuring are negotiated means that the process is unduly difficult in practice, as a dissenting or aggrieved creditor can make a run on the assets, potentially forcing the debtor into an insolvency process or leading to the ‘ransom' payment of certain claims that may be contrary to the spirit of the restructuring and frustrate the purpose of the arrangement.
In the case of a creditors' arrangement, under the Insolvency Act, a debtor can apply to the court for a moratorium order if an eligible insolvency practitioner has agreed to act as an interim supervisor and other specific conditions are satisfied. The moratorium order imposes a number of restrictive conditions on the debtor and obligations upon the interim supervisor to monitor the affairs of the debtor. The court must also be satisfied that the moratorium order will facilitate the debtor's proposal. The moratorium order does not affect the rights of a secured creditor. It also has limited duration, lasting only 14 days unless this period is extended by the court; and the application is on notice so may be contested by a party in interest – potentially resulting in a costly and protracted process, or a distraction from the restructuring negotiations themselves. Thus, while the moratorium order – notwithstanding the costs of the application itself and the requirements to monitor and report on compliance with its terms – is ostensibly a good idea in theory, it has limited value and practical application in reality.
3.6 What process do restructuring proceedings typically follow (including likely length of process and key milestones)?
The BVI legislation provides for a number of insolvency options and procedures that could facilitate a restructuring – principally, creditors' arrangements, receivership, administrative receivership and administrations (although the provisions on administration have not yet been brought into force). Recently, the BVI courts have also shown themselves willing to use the interim relief of provisional liquidation available under the liquidation regime – which has traditionally been available only as a ‘protect and preserve' measure where there is evidence of asset dissipation – as an avenue to facilitate restructuring. The expansion of the application of this relief has been welcomed and confirms the flexibility of the courts in using existing legislative measures to provide practical solutions to problems faced in cross-border restructuring. The moratorium offered by the BVI provisional liquidation protected the BVI companies from claims which could have disrupted or hampered restructuring efforts taking place in Brazil. However, where a court assists claimants through the innovative use of the existing legislative framework and common law precedents, some parties raise concerns about this flexible use of the jurisprudence. Constellations Overseas Limited (BVIHC (Com) 2018/0206-2012) will certainly add to the debate on whether the British Virgin Islands is, and will continue to be, a ‘creditor-friendly' jurisdiction; or whether it can it adapt in the same way as other offshore jurisdictions to find solutions to modern global business that protect multinational operations in their corporate structure while they pursue reorganisation or debt restructuring.
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.
The debtor must be open and transparent, engaging with advisers and stakeholders and providing adequate and accurate information (including forecasted financials) so that they can make an informed decision on whether to support the proposed restructuring. It must continue to engage during the restructuring itself, as otherwise the commercial reality of the proposed restructuring may not be realised; and if variations are needed, the sooner the debtor tells its stakeholders, the better. Otherwise, they may become disillusioned with the debtor and company management, potentially leading to a hostile environment that is not conducive to potential negotiations that may need to take place.
(b) Directors of the debtor
The directors' responsibilities are, for the most part, congruent with the debtor's. However, the directors should also be cognisant of their fiduciary duties to creditors if the business is in the ‘zone of insolvency'. They should take independent legal advice and immediately disclose any facts that may give rise to a conflict of interest or perception thereof to the professional advisers.
(c) Shareholders of the debtor
Depending on the process envisaged, the shareholders either may not be impacted at all or could be asked, for example, to make changes to their equity or forgo dividends. Shareholders that hold issued and unpaid capital will also be debtors of the company, with their liability limited to that unpaid share capital – unless the entity is not a limited liability structure, in which case the shareholder should consider its exposure if the business is in distress.
(d) Secured creditors
It is rare that a secured creditor's rights are affected by a restructuring; but if a secured lender is brought into the process, it should ensure that its security is valued accurately to assess exposure. Independent legal and financial advice is critical, to ensure that no steps are taken that could devalue its investment. If it is asked to waive or exchange debt or to postpone repayments, the lender should consider additional security, collateral or guarantees, while maintaining an appropriate balance of pressure on the debtor to maximise the chances of a successful restructuring. Covenants that are too onerous may have short-term positive results for the secured creditor, but may affect the long-term viability of the business.
(e) Unsecured creditors
As there is no stay on proceedings in the negotiation and agreement phases of a restructuring, unsecured creditors are advised to think carefully before taking precipitative enforcement action. This will incur costs for the individual creditor, which will not necessarily be recovered if the entity becomes insolvent – for example, if the restructuring is not approved or is approved but subsequently fails. Furthermore, being the first to issue a statutory demand or winding-up order does not equate to payment. If the directors are facing insolvency, they will be advised not to make ad hoc payments to creditors, despite pressure from collection agents and legal demands. The directors will be careful not to make any payments that may later be regarded as a preference; even if a payment is a bona fide due and payable debt, with issued letters before action, this will not guarantee remittance. Furthermore, once in insolvency, unsecured creditors are treated equally under the parri passu principle; so in case of liquidation, an unsecured creditor that has issued a statutory demand will not receive more money or faster payment than anyone else. It is therefore important to balance the relative costs and expected advantage of taking action when a restructuring is proposed.
Due to the nature of companies incorporated in the British Virgin Islands, which are often asset holding companies or shell entities, employees and preferential claims are rarely involved in this context. However, the position for preferential creditors in restructurings is that their claims are rarely compromised, so the plan/arrangement itself will rarely affect employees. However, there is a risk that a business experiencing some sort of distress that requires reorganisation may have to make staff cuts, implement efficiency measures or close down loss-making divisions – which will often have direct consequences for employees.
(g) Pension creditors
Part of a pension claim could be preferential (currently up to $5,000 for each employee), while the remainder is unsecured; this is in respect of current employees whose contributions were not paid over to the pension fund.
(h) Insolvency officeholder
The role and duties of any insolvency office holder will vary depending on the specific procedure being proposed. Generally, however, the insolvency office holder should ensure independence and fairness, undertaking the role with due care and diligence in accordance with the respective code of ethics. The proposal should be fair and balanced, as well as being sensible and practical, ensuring that the proposal has a good chance of being both approved and successfully implemented in accordance with the proposed terms.
The court's role will also vary depending on the procedure. However, in most cases the court will take a supervisory role; while the insolvency office holder is an officer of the court who will supervise the arrangement, the court will take a high-level supervisory role and can direct and opine as it sees fit.
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?
There are no specific cram-down provisions in the legislation, but dissenting creditors can be overruled by the majority in most restructuring procedures, subject to a right of challenge if there is manifest unfairness or prejudice.
3.9 Can restructuring proceedings be used to compromise secured debt?
Yes, but the secured creditor must agree to this. If there is no consensus, the secured creditor's rights survive the restructuring and the secured debt must be honoured because in the event of default, the secured creditor can still enforce. Most restructuring proposals will have an automatic failure clause in the event of the debtor's insolvency.
3.10 Can contracts / leases be disclaimed or otherwise addressed through restructuring proceedings?
There are no specific provisions in this regard. However, as restructuring procedures are voluntary and consensual, contract terms can be varied, subject to the relevant approval percentages and mechanisms. As long as the contract or lease does not convey secured creditors' rights, in theory it may be disclaimed or varied through a restructuring procedure. The practicalities of the waiver, deferral or write-off of any debts and claims should be considered as part of the preparation of the plan, agreement or arrangement, and in light of the ongoing needs of the business. Onerous contracts and loss-making leases may be disclaimed, but the damages and cost of doing so should be considered as a cost-benefit exercise while the proposal is being developed.
3.11 Can liabilities of third parties (e.g. guarantors) be released through restructuring proceedings?
There are no specific provisions in this regard. However, as restructuring procedures are voluntary and consensual, contract terms can be varied, subject to the relevant approval percentages and mechanisms. The consequential value of the claim that arises must be considered in light of the influence that this party could have on voting and potential disruption to the arrangement, as well as the cost to the debtor compared to the value of servicing the debt going forward.
As a restructuring process cannot bind secured creditors without their consent, if a debt is secured the debtor will need to negotiate with the party in a bid to agree consensual terms.
If the creditor does not agree, a third-party entity is often brought into the process, so that guarantors can join in the restructuring. This will also bind those creditors, subject to the relevant approvals of the creditor body. This is especially the case if the debts are on a joint and several liability basis: although the principal arrangement may bind the creditor against the principal, enforcement against the guarantor is still possible in the event of default (or otherwise pursuant to the terms of the lending agreement), and such third parties will become liable if the principal debtor fails to pay – thus undermining the spirit and objective of the restructuring proposal.
In theory, third-party liabilities can be disclaimed or varied through a restructuring procedure. The practicalities of the waiver, deferral or write-off of any debts and claims should be considered as part of the preparation of the plan, agreement or arrangement, and in light of the ongoing needs of the business. Onerous contracts and loss-making leases can be disclaimed, but the damages and cost of doing so should be considered as a cost-benefit exercise while the proposal is being developed.
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)?
No specific provisions in the legislation give priority to providers of new money in the context of restructuring proceedings. However, measures akin to ‘debtor-in-possession' financing under the US bankruptcy regime are sometimes available in practice in the British Virgin Islands. Their availability will often come down to the circumstances of the specific case and the willingness of the insolvency office holder, the debtor, the lender and other parties (eg, existing lenders) to agree on suitable terms. Lenders can request additional security, uplifts or priority for providing funding to a debtor in financial difficulty. It is customary practice for lenders to seek extra protection when lending to high-risk clients and this is no different during a restructuring. In restructuring proceedings, this is often a more public negotiation involving numerous stakeholders, and could result in an intercreditor deed whereby the other incumbent creditors may waive certain claims so that the new (or existing) financier that provides new money can be sufficiently compensated for the risks it assumes. The agreement reached can also require sanction of the BVI court. As with any commercial agreement, the more onerous the terms, the more the court will need to be persuaded that the agreement is in the best interests of all stakeholders.
3.13 How do restructuring proceedings conclude?
The terms of the procedure will determine how the process will conclude. Often, automatic termination events and events of default will be built into the proposal document; but the debtor will be given a finite period of time to remedy the default, so as not to create a situation whereby a minor fault could derail the entire restructuring.
However, a series of unremedied breaches is likely to mean that the restructuring will fail.
If the terms of the restructuring have been successfully completed, the party overseeing the process will often prepare a final report and a certificate of completion. The company will then be handed back to the directors or other measures as set out in the arrangement/plan will be followed to bring the matter to a close.
4.1 What types of insolvency proceeding are available in your jurisdiction, and what are the benefits and drawbacks of each?
The main insolvency procedures available in the British Virgin Islands are liquidation and receivership.
Liquidations can be member led (both solvent and insolvent) or court led. The liquidation regime is akin to the English law system, with solvent liquidations deriving from the companies legislation and insolvent voluntary (member/director-led) and court liquidation deriving from the insolvency legislation.
The court can also appoint a liquidator to a dissolved company or a foreign company (subject to relevant nexus).
The liquidator's task is to collect in the assets and distribute them accordingly. This is a winding-up procedure and thus marks the end of the life of the company, which will ultimately be struck off and dissolved.
Court liquidation is often commenced due to concerns over solvency, when a creditor applies to enforce a debt or pursue assets to satisfy its claim. However, liquidators can be appointed for a variety of other reasons, including a just and equitable winding up – for example, where the board of directors or members is deadlocked – or for public policy reasons, such as where the company is engaged in improper motives (a public policy winding up must be initiated by the attorney general or the Financial Service Commission (FSC)).
Receivership is not a collective procedure, but usually takes place at the behest of one party. As with the UK regime, it is typically an enforcement process for a secured creditor.
Out-of-court receivership is governed by the terms of the lending agreement and strict notice requirements apply under the Insolvency Act.
Interim relief is also available by virtue of a provisional liquidation, whereby an insolvency practitioner is appointed before the winding-up hearing, with a protect and preserve mandate to safeguard the debtor's assets. This most frequently occurs where there is evidence of risk of a dissipation of assets, so an independent party is appointed to oversee matters until the court can hear the winding-up application.
Similar interim relief for the protection of assets is also available in receiverships. However, a minor difference is that the interim receiver need not be a licensed insolvency practitioner; the court need only be satisfied of the proposed interim receiver's ability to exercise the office and discharge his or her functions to the court.
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 solvent liquidation may be initiated by the members or directors, or the company itself. Whoever initiates the process will select the liquidator and there is no right of veto, as the company is solvent. Only if the company turns out to be insolvent can the process be challenged – in which case the liquidator must take steps to convert the solvent liquidation into an insolvent liquidation and appoint an independent party.
A voluntary insolvent liquidation may be initiated by the members or directors, or by the debtor itself, and the liquidator's appointment will subsequently be ratified by the creditors. Whoever initiates the process will appoint a liquidator; this appointment may be ratified or overturned by the creditor body, should it have sufficient votes to do so.
A court liquidation may be initiated by several parties: a creditor, the debtor, the members or directors, the attorney general or the FSC. The applicant can propose a liquidator, who must submit consent to act as such to the court; the court is free to appoint this proposed individual or someone else. The liquidator becomes an officer of the court once appointed.
If the appointment is contested, the defending party can propose an alternative. However, often the court and the proposed liquidator will require some security or undertaking for costs in the event that the assets are insufficient to pay the fees and expenses of the liquidation.
It is also possible for the court to appoint the official receiver, who can also convene a creditors' meeting to allow the creditors to nominate and resolve to appoint a private insolvency practitioner.
Overseas liquidators can act with a BVI licensed insolvency practitioner, with the prior approval of the FSC.
In a receivership, the process will depend on the security granted. In the case of a fixed charge, the receivership will be a fixed charge receivership over a specific asset or group of assets. A fixed charge receiver need not be a licensed insolvency practitioner.
In the case of a floating charge, it is possible to commence an administrative receivership over the entire business and assets of the company. An administrative receiver must be BVI licensed and an eligible insolvency practitioner.
A court-appointed receiver must also be a BVI licensed insolvency practitioner and becomes an officer of the court once appointed.
4.3 What are the effects of the commencement of insolvency proceedings, both for the debtor and for creditors?
Once a liquidator has been appointed, he or she has a duty to collect in the assets of the debtor. The directors' powers automatically cease and the liquidator controls the debtor. There is an automatic stay on creditors' actions; but creditors can apply to the court to have this stay waived in specific circumstances. The appointment of a liquidator does not affect the rights of secured creditors, which can still enforce their security; but generally no proceedings can be commenced against the debtor once in liquidation.
No amendments to the debtor's memorandum and articles of association can be made and shares cannot be transferred.
Creditors should take steps to mitigate their loss and submit their claims to the liquidator at their earliest convenience.
The appointment of a fixed charge receiver does not affect the debtor itself – only its ability to use the asset over which the charge has been enforced. The debtor remains liable for existing contracts, although the receiver has a duty to mitigate losses and account to the secured creditor for the expenses of the receivership.
An administrative receiver has broader powers and can continue to trade the business. However, the likelihood of this happening in the British Virgin Islands is very rare: given the prevailing corporate structures, few businesses incorporated in the jurisdiction have trading operations there.
A receiver acts as the agent of the debtor, not of the appointor, but will often be indemnified by the appointer for an amount equal to the perceived risks of the engagement, and is also entitled to an indemnity from the assets of the receivership for liabilities. This indemnity is most important given that the receiver is personally liable for any contract entered into in the performance of his or her functions.
4.4 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?
Upon the appointment of a liquidator, there is an automatic stay of action, meaning that no legal proceedings can be commenced, no creditor enforcement actions can be initiated and no actions can be commenced against the debtor's assets.
This moratorium does not affect the rights of secured creditors, which can still commence enforcement proceedings while the liquidator is in office. The general stay on execution can also be waived by application to court, which can sanction the lifting of the moratorium for specific debts.
4.5 What process do insolvency proceedings typically follow (including likely length of process and key milestones)?
The process, duration and key milestones will vary depending on the proceedings. The most common insolvency proceeding in the British Virgin Islands is court-led or member-led insolvent liquidation. The liquidator must follow statutory steps to notify his or her appointment to the registrar of corporate affairs, creditors and members, and the debtor and its officers. The directors should be requested to submit a statement of the debtor's affairs, including details of all assets and liabilities written up to the date of the liquidation. The liquidator will also advertise the appointment and, if appropriate, call for creditors to submit their claims in writing.
The liquidator will investigate the affairs of the debtor and make enquiries into the assets on the balance sheet and possible other assets, such as claims and legal actions that may be taken in the debtor's name. The liquidator should be able to understand the deficiencies in the debtor and the reasons for its failure, and will review the directors' and officers' conduct to assess whether they upheld their fiduciary duties to the debtor and its creditors.
Once all possible assets have been identified and realised, creditors' claims should be reviewed and adjudicated upon. Should there be sufficient realisations to enable a distribution to the creditors, the liquidator will declare and distribute a dividend, after payment of all costs.
Following filing of the liquidator's final report and confirmation that no parties object to the conclusion of the liquidation, the registrar will dissolve the company.
Receivership can vary in terms of the length of the process and milestones. In a fixed charge receivership, where a receiver is appointed over a specific asset, the objectives are clear: the asset will be valued, marketed and sold, and the proceeds distributed. However, court-appointed receiverships may be commenced for a wide range of reasons, from a shareholder dispute or deadlock to disagreement over who is beneficially owed the proceeds of an asset, to a general protect and preserve mandate – for example, where there is risk of dissipation of assets and an independent party is appointed to maintain the status quo.
The powers and duties of the receiver in this latter scenario will be set out in the Insolvency Act and the relevant court order. The receiver, and often the applicant in the proceedings, will have the direction to apply to court to have these powers varied or added to if this is necessary in the circumstances.
The receiver will typically have to report back to the court, as the supervisory authority, on the progress of enquiries made, the conduct of the parties (if relevant) and any other information that the receiver feels the court should be made aware of in consideration of the underlying proceedings.
The court order may specify an event that brings the receivership to a close. Alternatively, and more characteristically in a court-appointed receivership under a ‘protect and preserve' mandate, the receiver will report to the court at regular points during the primary proceedings and will continually assess whether the role is still required in light of the perceived risk of dissipation. If appropriate, any of the parties in interest can apply to have the receivership terminated, which the court will decide as it sees fits.
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.
As liquidation is a terminal process, the debtor will be wound up and will no longer trade; until that can happen, the liquidator steps into the shoes of the directors and manages the debtor.
In a receivership, depending on the type of receivership and the terms of the receivership order (in the case of a court-appointed receivership), the debtor may be able to continue once the receivership has concluded. Receivership does not mean the end of the debtor, but it is nonetheless a major step for the applicant – for secured creditors, it is often the action of last resort.
(b) Directors of the debtor
In liquidation, the directors' powers cease, but their duties remain. In particular, their fiduciary duties to the debtor and its creditors survive the appointment of the liquidator, so they are still required to cooperate and assist the liquidator in performing his or her functions. The directors should put their personal situation to one side and ensure that they are beyond reproach in their behaviour, as the liquidator has extensive powers to take action against directors who have been delinquent and caused loss to the debtor – especially in the ‘zone of insolvency', when they ought to have reasonably known that the debtor had no chance of avoiding insolvency.
(c) Shareholders of the debtor
In a court liquidation, the shareholders typically have a limited role: they are expected to deliver up any assets and account to the debtor for any unpaid capital. In the case of a limited liability company, their exposure equates to the value of their investment and any guarantees given. Shareholders may initiate the liquidation and appoint the liquidator in case of a member-led voluntary liquidation; but after the appointment (and ratification) of the liquidator, their role and involvement diminish greatly.
(d) Secured creditors
Liquidation does not affect the rights of secured creditors; so for all intents and purposes, a secured creditor is not affected by the appointment of a liquidator.
(e) Unsecured creditors
Liquidation is a class remedy, so all creditors of the same class are treated equally. In a court liquidation, the petitioning creditor enjoys no real advantage over other creditors as a result of initiating the proceedings. In a member-led liquidation, a simple majority is needed to ratify the members' choice of liquidator – the creditors cannot veto the decision to place the debtor into liquidation, but only the identity of the liquidator. Unsecured creditors may increase their influence on the proceedings by nominating themselves (and/or others) for membership of a liquidation committee, if the value of their claim is sufficient to get elected. The liquidator will often use a creditors' committee as a sounding board – for example, if a legal claim will be pursued, they may seek the counsel of the committee and sanction to go ahead. The committee also has the power to review and approve the liquidator's remuneration and expenses.
In the British Virgin Islands, employee claims are not a prevalent matter because most companies incorporated in the jurisdiction carry out their business elsewhere. This could change with the advent of economic substance provisions and the introduction of new 2019 legislation, but that will take a significant amount of time to unfold. At present, however, most BVI companies do not have employees.
(g) Pension creditors
For the same reasons as employee claims, pension claims are a minor issue in the British Virgin Islands.
(h) Insolvency officeholder
The core duties of a liquidator under the act are:
- to take possession of, protect and realise the debtor's ssets;
- to distribute the debtor's assets (or the proceeds of their realisation) in accordance with the Insolvency Act; and
- if there are surplus assets remaining, to distribute them, or the proceeds of their realisation, in accordance with the act.
This is a distilled version of the officer holder's duties. Depending on the facts of the case, the liquidator could be involved in asset tracing, recovering physical assets, dealing with legal claims, taking recovery action against delinquent directors and a whole host of other actions around the globe. The liquidator must act with a high standard of care, and is entitled to take legal advice and to submit any matter concerning the liquidation to the court for guidance or directions.
The court's role will also vary depending on the procedure. In most cases, however, the court will take a supervisory role. While the insolvency practitioner is an officer of the court and will supervise the liquidation, the court takes a high-level supervisory role and can direct and opine as it sees fit, upon request of the office holder or by judicial direction.
4.7 What is the process for filing claims in the insolvency proceedings?
Creditors can voluntarily submit claims in writing to the liquidator. The liquidator will often invite creditors to submit claims or advise that the likelihood of a dividend being paid is low, thus indicating that the cost of submitting a claim may outweigh any benefits in doing so.
The submission of claims may amount to a submission to the jurisdiction of the BVI court.
Where the liquidator issues a notice of his or her intention to declare a dividend, any creditor that has not submitted a claim by the date specified is excluded from the distribution.
The liquidator will adjudicate the claim and if it is rejected, written reasons must be provided. A creditor has a right to dispute the liquidator's determination by responding in writing; this may result in an application being made to court for review of the claim.
It is always advisable for the liquidator and creditor to enter into a sensible dialogue in advance of a final determination being made – particularly if there is a significant discrepancy in their respective views of what the claim determination may be. This can avoid costly and protracted court proceedings – especially as the liquidator has the power to settle or compromise any claims, with sanction from the court.
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)?
The proceeds of realisation of assets are distributed in the following order of priority.
First, the proceeds of sale of charged assets are paid to the secured creditors, less the costs of realisation. A secured creditor may value the asset over which the security held and be ranked for the unsecured element of its claim, or surrender the security and be ranked for the whole amount on an unsecured basis, pari passu with the general body of creditors. This is obviously in the secured creditor's interests only if it is the majority creditor and has assurance that no unforeseen debts may arise which would dilute its return.
The proceeds of realisation of unsecured assets are then distributed after payment of the costs of the insolvency proceedings and the office holder's remuneration – first to preferential creditors and then to unsecured creditors, which share equally in the distribution on a pari passu basis.
Under Schedule 2 of the Insolvency Act, the following qualify as preferential claims:
- wages and salary, including commission payments, due to employees for the six months immediately prior to the relevant date (ie, the date on which the insolvency proceedings commenced) and accrued holiday pay, up to a maximum claim of $10,000;
- amounts due to the BVI Social Security Board in respect of employee deductions and employer's deductions for the six months prior to the insolvency – this amount is unlimited, although amounts relating to employer's contributions beyond the six months will be unsecured;
- amounts due in respect of pension contributions or contributions in respect of medical insurance payable in the 12 months immediately before the relevant date by the debtor as the employer of any person, including any amounts deducted from the employee, to a limit of $5,000 per employee;
- sums due to the BVI government in respect of any tax, duty (including stamp duty), licence fee or permit, to a preferential limit of $50,000; and
- sums due to the FSC in respect of any fee or penalty, to a preferential limit of $20,000.
If there are sufficient funds to pay all preferential and unsecured creditors in full, creditors are entitled to statutory interest on their claims. This is set at the higher of the court rate or, in essence, the contractual rate that would have applied had the company not entered into insolvency.
Any assets remaining after payment of the above are then distributed to the shareholders.
4.9 What is the effect of insolvency proceedings on existing contracts? Is the counterparty free to terminate? Can they be disclaimed?
Contracts entered into prior to liquidation are not automatically affected by the commencement of liquidation. The liquidator may take the benefit of the contract but, in loose terms, for post-liquidation periods will be required to pay for the benefit derived. The liquidator also has the power to disclaim onerous contracts or property, and can do so by following the provisions of the Insolvency Act. The process changes depending on the type of contract or property, but the liability created upon disclaimer ranks as an unsecured claim in the liquidation (unless it is an employment contract, in which case part of the liability may be a preferential claim). Strict notice periods set out in the Insolvency Act apply where a liquidator disclaims property; and it is important that anyone with rights in the disclaimed property is notified – otherwise the liquidator may commit an offence.
The appointment of a receiver does not affect the corporate existence of the debtor, although the
directors are divested of authority in respect of property covered by the appointment. The debtor
remains liable for its existing contracts and the receiver acts as the agent of the debtor.
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 BVI legislation provides for ‘claw-back' claims and voidable transactions, which can be challenged by a liquidator. This is often a route for the liquidator to recover assets for the benefit of the estate and creditors as a whole.
There are four types of voidable transactions: unfair preferences, undervalue transactions, voidable floating charges and extortionate credit transactions.
To void an unfair preference, undervalue transaction or voidable floating charge, the transaction must either have been made at a time when the debtor was insolvent or have caused the debtor to become insolvent. There is a presumption of insolvency, which can be rebutted, and the legislation explicitly excludes balance-sheet insolvency for this purpose. The relevant period is six months prior to commencement of the liquidation, although this period is extended to two years where the transaction was with a connected party.
4.11 How do the insolvency proceedings conclude? Can any liabilities survive the insolvency proceedings?
A liquidation is concluded when all assets are realised – or where the liquidator concludes that an asset is not realisable or the cost of doing so would be prohibitive, so it is effectively abandoned – and those assets collected (or the proceeds of sale) are distributed to the stakeholders in accordance with the statutory waterfall.
The liquidator prepares a report, including a final account, which is sent to the creditors whose claims have been admitted and all members, as well as the registrar of corporate affairs. The report must contain a statement of realisations and distributions in respect of the liquidation and a summary of the grounds on which a creditor or member may object to the striking of the debtor from the register. If no objections are received, the registrar will proceed to dissolve the debtor.
If a liability has not been dealt with as part of the liquidation process, a creditor can apply to the court to have the debtor restored to the status that it was in immediately before dissolution (ie, liquidation). While this is technically possible, there is a question as to the practical benefit that creditors will gain from this process and whether any benefit will be greater than the costs. An independent qualified and licensed insolvency practitioner will already have reviewed the affairs and books and records of the debtor, and determined that all collectible assets have been dealt with, leading to submission of the final report and dissolution of the debtor. In practice, however, there may well be instances in which assets have been hidden or where known assets are not readily collectible (eg, due to a lack of funding). If a creditor or party in interest wishes to fund asset-tracing steps at a later time, the option is there to make an application to court to have the entity restored and a liquidator appointed to pursue a potential action or asset.
5 Cross-border / Groups
5.1 Can foreign debtors avail of the restructuring and insolvency regime in your jurisdiction?
The BVI insolvency regime is a mix of hard law (enacted legislation) and soft law derived from common law case precedent both from within the British Virgin Islands and from rulings of the Judicial Committee of the Privy Council.
The Insolvency Act has provisions that govern cross-border assistance and incorporate the UNCITRAL Model Law. However, Part XVIII – which sets out the provisions based on the UNCITRAL Model Law – has not yet been brought into force and it is not clear when this may change.
Therefore, while designated territories or countries enjoy statutory access to assistance, countries that are not on this list may struggle to avail of assistance from the BVI courts, until the status quo is tested.
Foreign debtors have the same access to the regime as domestic creditors.
5.2 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 deals with orders in aid of foreign proceedings. It provides for a foreign representative to apply to the BVI court for an order in aid of assistance to:
- restrain the commencement or continuation of any proceedings, execution or other legal process or levying of any distress against a debtor or in relation to any of its property;
- restrain the creation, exercise or enforcement of any right or remedy over or against any of the debtor's property;
- require any person to deliver up to the foreign representative any property of the debtor or the proceeds of such property;
- make such order or grant such relief as it considers appropriate to facilitate, approve or implement arrangements that will result in a coordination of a BVI insolvency proceeding with a foreign proceeding;
- appoint an interim receiver of any property of the debtor for such term and subject to such conditions as it considers appropriate;
- authorise the examination by the foreign representative of the debtor or of any person that could be examined in a BVI insolvency proceeding in respect of a debtor;
- stay or terminate or make any other order it considers appropriate in relation to a BVI insolvency proceeding; or
- make such other or grant such other relief as it considers appropriate.
As a fundamental principle to all BVI insolvency proceedings, this does not affect the rights of a secured creditor and the legislation specifically provides for this protection.
The BVI court has the discretion and choice of law as to whether to apply the BVI law or the law of the foreign proceedings.
If a BVI company is subject to insolvency proceedings elsewhere because it has assets or its centre of main interests in another jurisdiction, a BVI liquidator can still be appointed to deal with assets held within the British Virgin Islands or to agree a protocol with the foreign representative as to how the split of duties and responsibilities may work in practice.
5.3 To what extent will the courts cooperate with their counterparts in other jurisdictions in the case of cross-border insolvency or restructuring proceedings?
The BVI courts must consider the relief that has been requested by the foreign representative and will have regard to a specific list of criteria when deciding what relief is appropriate and whether to grant the relief sought, as follows:
- The relief must not adversely affect the rights of a secured or preferential creditor;
- There must be just treatment of all persons claiming in the foreign proceedings;
- Persons in the British Virgin Islands that have claims against the company must be protected against prejudice and inconvenience in the proceeding of claims in the foreign proceeding;
- Distributions to claimants in the foreign proceedings must accord substantially with the order of distributions in a BVI insolvency; and
- The principle of comity must be respected.
The Judicial Insolvency Network (JIN), which was formed in October 2016, is a network of insolvency judges from around the work that serves as a platform for sustained and continuous engagement for the furtherance of judicial thought leadership, best practice and communication and cooperation. JIN has issued guidelines to address communication and cooperation among courts, insolvency representatives and other parties involved in cross-border insolvencies. The Eastern Caribbean Supreme Court (ECSC) signed up to these guidelines with effect from May 2017 via Practice Direction 8, Number 2 of 2017.
The ECSC has stated that this represents another step in the process of ensuring that, as far as practicable and as permitted by law, a debtor's estate is distributed among creditors in the most equitable manner possible and with the greatest benefit to the general body of creditors. The guidelines are voluntary. However, where they are adopted, there is a real likelihood that all interested parties will reap greater benefits from the estate.
It is clear that the judiciary, the legislature and practitioners in the insolvency sector are committed to ensuring that costs are minimised so that realisations can be maximised for return to creditors, whether the insolvency estate is administered in the British Virgin Islands or elsewhere.
5.4 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?
There is no specific concept of a group proceeding or consolidation in the British Virgin Islands. The courts will administer connected cases for efficiency and expediency; however, there is no procedure whereby assets and claims are pooled so that they can be administered as one. The principle of separate legal identity is upheld.
5.5 How is the debtor's centre of main interests determined in your jurisdiction?
Part XVIII of the Insolvency Act contains provisions that are based on the UNCITRAL Model Law and are thus underpinned by the concept of the centre of main interests. However, these provisions have not yet been brought into force.
5.6 How are foreign creditors treated in restructuring and insolvency proceedings in your jurisdiction?
There is no different treatment of domestic and foreign debtors in BVI insolvency or restructuring proceedings, other than the different treatment of different classes of creditors under the terms of the restructuring. Foreign creditors follow the same claims process as domestic creditors; in practice, most creditors (typically in both volume and value) in BVI insolvencies are foreign. When the liquidator calls creditors to make a claim, it does not matter where the debt was incurred or what law governed the debt; the liquidator must adjudicate and make a determination on all claims submitted to the estate.
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 have duties derived from common law to act in good faith, honestly and in the best interests of the debtor. In addition, the equitable duties of care, diligence and skill are expected of directors, tested subjectively under the ‘reasonable director' test of what a reasonable (sales/finance/managing) director would do in the circumstances. The BVI regime also imposes statutory duties on directors to disclose relevant interests or transactions that take place with the debtor, subject to certain limited exceptions – both specific transactions between the director and debtor and those in the ordinary course of business. Other statutory duties include record keeping and being aware of the debtor's financial position. There is no statutory requirement for directors to commence insolvency proceedings at a particular time; but the director liability provisions in the legislation imply a positive obligation for them to initiate insolvency proceedings at the appropriate time. This is always viewed on the specific facts, but directors should err on the side of caution and obtain professional advice at the earliest point possible to protect the interests of the debtor, its creditors and the directors themselves. Directors should carefully consider any transactions which the debtor will enter into and whether this could cause it to become insolvent or increase the losses to creditors. During this time, directors are expected to have regard to the position of the creditors, and the general duties discussed above are extended when the debtor is in the ‘zone of insolvency' to encompass the interests of the creditors as a whole.
6.2 Are there any circumstances in which the directors could incur personal liability in the context of a debtor's insolvency?
The overriding principle is that a company has separate legal personality and is liable for the debts it incurs. However, the corporate veil can be pierced due to the directors' acts or omissions. Depending on the facts, the director's knowledge and the outcome of the ‘reasonableness' test, the directors could face personal liability for any benefit received, for specific debts of the debtor or for any exacerbation of the debtor's situation from the date it became, or was deemed to be, insolvent. The exposure faced by the director will be associated with the breach of the various duties imposed and the consequences will be linked to the duty that was breached. Breach of a common law duty could result in the director being liable to repay debts that were incurred after the debtor became insolvent or the entirety of the increase in loss that the debtor suffered as a result of the director's actions – for example, the continuation of trading post insolvency. Breach of an equitable duty may result in an obligation to repay any gains made by the director. Breach of a statutory duty will be punished in accordance with the statutory framework. Of course, a director may be liable for breach of common law, equitable and statutory duties – these are not mutually exclusive. Liability is considered based on the facts of the case and the inferred knowledge of a ‘reasonable director'. Therefore, depending on the culpability of the director, he or she could be held personal liable for the debts of the debtor.
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)?
Exposure to liability in the context of insolvency is typically linked to actions taken, or not taken, that result in a breach (or breaches) of duties. It is rare that shareholders or other parties such as lenders will be exposed to liability when a debtor becomes insolvent; but there are circumstances that could lead to innocent or unconnected third parties being liable. As is customary, shareholder liability is limited to the value of their investment. For example, if a shareholder has received shares and there is unpaid capital, this will be called once the debtor is in insolvency proceedings – akin to an unpaid loan. If a dividend was paid at a time when the debtor was unable to satisfy the solvency test, this ‘illegal dividend' will be recalled when the office holder reconciles the capital of the debtor. This is another area where directors may face personal liability: if it can be shown that a director was aware that the debtor was insolvent, the balance of what is due after the shareholders have made their repayment can be claimed from the delinquent director.
Lenders may face exposure in an insolvency if security has not been perfected or could be challenged, resulting in what was considered or purported to be a secured debt slipping down the statutory waterfall to become a general unsecured debt. This is not liability per se, but is certainly a possible adverse consequence or risk of the debtor entering into insolvency proceedings.
7.1 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?
There are no specific provisions on pre-pack transactions; however, these can be effected through application of the existing provisions, in the appropriate circumstances.
A sale of assets by a receiver or liquidator is permitted without needing further sanction of the court; therefore, in theory at least, a pre-pack is possible. In practice, however, pre-packs are rare in BVI liquidations. The commercial rationale for, and relative prevalence of, pre-packs in the United Kingdom do not exist in the British Virgin Islands. The types of assets in a BVI liquidation are varied and broad, which could mean that a pre-pack situation is justifiable – but that would still be rare.
7.2 Is "credit bidding" permitted?
There are no specific provisions on credit bidding in the legislation; however, this can be done through application of the existing provisions, in the appropriate circumstances.
8 Trends and predictions
8.1 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?
9 Tips and traps
9.1 What are your top tips for a smooth restructuring and what potential sticking points would you highlight?
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.