Can a company that has been voluntarily wound up be restored to good standing on application by a former shareholder, liquidator or director who has a change of heart regarding the company's liquidation? The answer to this question has been reaffirmed following the recent High Court decision in the Four,(1) which confirmed the BVI position established in Dedyson Enterprises Ltd v Registrar of Corporate Affairs (BVIHCM 2011/0008) and reinforced in Yeung Kwok Mung v The Attorney General (BVIHCM 2011/0002).
The claims in the Four were brought by the former liquidator of four BVI companies: Brilliant Era Limited, Elite Source Ltd, Korri Capital Ltd and Careland International Ltd. Restoration of the companies was sought because it would:
- allow listing requirements to be fulfilled; and
- show a longer track record and allow the history and structure of the group to be reflected more accurately than if new companies were incorporated.
If restored, the companies were then to be listed on the Hong Kong Stock Exchange, which had the advantage of being close to Shenzhen, the home of Careland Shenzhen (originally held in the corporate structure of Careland International Ltd).
Part XII of the BVI Business Companies Act (16/2004) provides the regime under which solvent companies may be voluntarily liquidated. In order to satisfy the threshold established in Part XII, a company must first be able to demonstrate that it has no liabilities or that it can pay its debts as they fall due and that the value of its assets equals or exceeds that of its liabilities.
Once the threshold is satisfied and it is determined that a voluntary liquidator should be appointed to wind up the company, various other requirements must be satisfied. For instance, the directors of the company must make a declaration of solvency and approve a liquidation plan. In essence, the process is involved and calculated decisions must be taken if the end result is to be a voluntary liquidation.
A voluntarily liquidated company can be restored only if (at the very least):
- the applicant nominates a person to act as liquidator of the company once it is restored;
- the person appointed is eligible and consents to act as liquidator once the company is restored; and
- satisfactory provision is made for the expenses and remuneration of the liquidator on restoration.(2)
Very early in the judgment in the Four, it was determined that the applications could not succeed, because of failure to provide for the expenses and remuneration of the liquidator on restoration (part three of the Section 218A(2) test). The court nevertheless continued to consider the merits of the applications before it, as well as the objections raised by the defendant.
A number of substantive objections were raised by the defendant:
- It did not appear that the companies had any assets or that at least one creditor sought to bring a claim;
- There was no indication that the restorations would be in the interest of justice; and
- Alternatives to restoration existed, of which the judge in Kwok had stated: "If the difficulty can be resolved without restoration, then the alternative method is to be preferred."
The decisions in Dedyson and Kwok show that the courts require cogent and compelling reasons to reverse a liquidation at the behest of parties that had previously given assurances as to the completion of the process. Thus a former shareholder, liquidator or director cannot on a whim avoid the dissolution of a company that had gone through the process of voluntary liquidation. While not an absolute determination, it is clear that liquidation of a company should be final, save where:
- restoration would serve a beneficial purpose consistent with the requirements of justice; or
- there are newly discovered assets to be distributed by the company or claims to be made against a company which had not been made previously.
Each of these requirements was easily dispensed with by the defendant, which demonstrated that they were not applicable in the instant claims.
There was no doubt that each claimant would face an uphill struggle to persuade the court that it should not consider itself bound by Dedyson and Kwok, or alternatively that Dedyson could be distinguished and could not be deemed as persuasive authority (as its facts were very different to the claims of the Four). Nevertheless, the claimants urged the court to seek guidance from various English precedents, none of which were ultimately judged to carry the weight sought to be ascribed to them against Dedyson, Kwok or Sections 218A and 218B of the BVI Business Companies Act.
At Paragraph 16 of the Dedyson judgment, the judge observed that outside the scope of the two justifications for ordering the restoration of a company that had been voluntarily liquidated, only in the most exceptional circumstances could the restoration of a company for the resumption of business as usual be justified.
While it was common ground that exercise of the court's discretion was provided for in Section 218A of the BVI Business Companies Act, opinions diverged regarding the circumstances under which such discretion should be exercised. In particular, the claimants contended that according to Justice Laddie in the English case of Re Priceland ( 1 BCLC 467), "exercising the discretion against restoration should be the exception and not the rule". This rationale – as well as the rationale of the other English precedents – was opposed because the restoration sought in each such case was a result of dissolution by administrative striking off, not following the procedure of placing companies into and completing the process of voluntary liquidation. It was argued that in the case of a voluntary liquidation (unlike in the case of administrative striking off), there is a deliberate act to bring about the permanent winding up of a company.
Supporting the common law position, amendments to the BVI Business Companies Act make it clear that a company restored following the process of voluntary liquidation is not a company in good standing, but is instead returned to the status in which it would have been before the dissolution (ie, in liquidation). Similarly, when a company is dissolved following administrative striking off, on restoration it is not returned to good standing until all back fees and penalties are paid.
The defendants even argued that while the value of the undistributed assets in each of the companies was nominal, the restoration of each company was commercially sensible and went hand in hand with the light-touch BVI regulatory regime, and that such restorations would cause no prejudice to the jurisdiction or the registrar. The court took a more measured approach in assessing the claims, pointing out the wide range of effects of a restoration in this context. In particular, the court noted that a restoration would resuscitate the rights and obligations of third parties and that this could result in prejudice to the third parties concerned.
The court therefore disagreed with the claimants that Dedyson fettered its discretion to order restoration and clarified that the decision merely "signposts matters which will assist a court in the exercise of the statutory discretion". It further illustrated the clarifications brought about post-Dedyson, with the addition of Sections 218A and 218B to Part XII of the BVI Business Companies Act.
Ultimately, the court advanced that the onus was on a claimant seeking restoration in the context of voluntary liquidation to prove that the circumstances warranted restoration and address the potential prejudice that could befall third parties. In this case, the claimants' cases fell far below this mark and their applications for restoration therefore failed.
For further information on this topic please contact Kimberly K Crabbe-Adams at Harney Westwood and Riegels by telephone (+1 284 494 2233) or email (email@example.com). The Harneys website can be accessed at www.harneys.com.
(1) See 2015 decision of the BVI High Court in the consolidated matters of: Elite Source Limited v the Registrar of Corporate Affairs (BVIHCV 0077/2013); Korri Capital Limited v the Registrar of Corporate Affairs (BVIHCV 0078/2013); Careland International Co Limited v the Registrar of Corporate Affairs (BVIHCV 079/2013); and Peng Xiaohong v the Registrar of Corporate Affairs (BVIHCV 080/2013).
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