The Insolvency Act 2003 of the British Virgin Islands (the "IA") provides that the netting of financial contracts is legally enforceable notwithstanding any provisions of the IA or the Insolvency Rules. Significantly, this means that where an insolvent entity that is party to a financial contract goes into liquidation, what might otherwise be a voidable transaction will be upheld if carried out pursuant to a netting agreement.
In order to be legally enforceable in this way, the netting agreement governing the financial contracts must be an agreement between two parties only. Therefore, it is critical that netting agreements are structured as bilateral contracts rather than multilateral contracts.
Financial contracts are contracts pursuant to which payment or delivery obligations that have a market or an exchange price are due to be performed at a certain time or within a certain period of time. Examples include currency or interest rate swap agreements, futures or options, and equity or credit derivatives.
Insolvency set-off
Section 150(1) of the IA provides that where, before the liquidation of a company, there have been mutual credits, mutual debts or other mutual dealings between the company and a creditor claiming or intending to claim in the insolvency proceeding, the sums due from one party shall be set-off against the sums due from the other party and only the balance of the account, if any, may be claimed in the insolvency proceeding or is payable to the company, as the case may be.
Section 150(2) goes on to say that a creditor is not entitled to claim the benefit of a set-off if it had actual notice that the company was insolvent:
- at the time it gave credit to the company or received credit from the company; or
- at the time it acquired any claim against the company or any part of or interest in such a claim.
Validity of agreements to subordinate debt
Section 151 of the IA provides that where, before the commencement of the liquidation of a company, a creditor of that company acknowledges or agrees that, in the event of a shortfall of assets, it will accept a lower priority in respect of a debt than that which it would otherwise have, that acknowledgment or agreement takes effect except to the extent that a creditor of the company who was not a party to the agreement is prejudiced
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