Monarch Pointe is the latest in a series of decisions of the BVI courts on the rights in liquidation of redeeming members of funds incorporated in the jurisdiction.
In Westford Special Situations Fund Limited v Barfield Nominees et al (2011 HCVAP 2010/014) the Court of Appeal decided that since redemption proceeds are payable to an investor in their character as a member, section 197 of the BVI Insolvency Act 2003 prevented redeemed but unpaid members presenting a winding up petition.
In Spectrum Galaxy Fund v. Xena Investments (BVI HCM 2011/0040) the Court of Appeal held that the assignee of redemption proceeds was also caught by Section 197.
Krys v. Stitchting Shell Pensionfonds (HCVAP 2011/036) involved a claim submitted by Shell as a redeeming investor in Fairfield Sentry. The Court of Appeal provided clarification of its earlier judgment in Westford, emphasising that nothing stated therein should be understood to mean that a redeeming member is not a creditor – such a member (or ex-member) is simply prevented by section 197 from invoking the insolvency regime.
What, then, of a redeeming member who wishes to claim in a liquidation properly initiated by an external creditor? Specifically, is a redeemed but unpaid member entitled to be paid redemption proceeds in priority to the distribution of surplus assets to existing, unredeemed members?
The BVI Commercial Court answered this question in the negative, holding that redeemed but unpaid members ranked equally with remaining members, but gave the redeemed members leave to appeal to the Eastern Caribbean Court of Appeal.
By section 197 of Insolvency Act:
A member, and a past member, of a company may not claim in the liquidation of the company for a sum due to him in his 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.
Section 207 lists the priority of payments. The rankings pass directly from "all admitted claims" (and interest), to "surplus assets". By section 197 (above), redemption claims are not "admitted claims" until external creditors have been paid up.
It was therefore open to the existing, unredeemed creditors to contend for a "black hole" into which the redemption proceeds fell. Perhaps more realistically, they sought to support Bannister J's decision that redeemed but unpaid members ought to rank equally with remaining members.
The Court of Appeal dealt with this point by noting that the section 207 ranking was subject to the other provisions of the Act. By section 197, redemption proceeds are to be taken into account in the "adjustment" of the rights of members past and present. Accordingly, the combined effect of sections 197 and 207 was held to be as follows: whilst redeemed but unpaid members were creditors of the company in the wider sense, they did not have standing to apply for the appointment of liquidators, or to compete with "outside" creditors in the early stages of the distribution (decided in the Westford and Shell Pensioenfund cases). However, once those external creditors had been paid up, redemption claims would be taken into account in carrying out the "adjustment" contemplated by section 197.
Whilst noting the force in the redeemed members' contention that they ought to rank ahead of remaining members as a matter of principle, drawing an interesting analogy with the old English building society cases, the Court of Appeal determined the "adjustment" question on the wording of the Memorandum and Articles of the fund in question. Given that "surplus" was therein defined as the aggregate of total assets over total liabilities, and given that the unpaid redemption proceeds were liabilities, these could form no part of the surplus distributable under section 207: "The redeemed members must be paid before any surplus is ascertained out of which the continuing members may be paid."
The decision of the Court of Appeal will provide a degree of certainty to members of funds, past and present, as to their entitlement upon liquidation. Whether it will also encourage members to seek early exits in troubled times – in an attempt to climb the distribution ladder – remains to be seen.
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.
