Definitions
Set-off and Netting
Voidable Transactions
Cross-Border Insolvency
Liquidation
Creditors Arrangements
Malpractice and Disqualification
Insolvency Practitioners
Administration
Administrative Receivership
A new Insolvency Act was passed on April 17 2003. Although it is not yet in force some provisions will have retroactive effect, meaning that knowledge of the act is extremely important when structuring transactions. Early indications are that most of the act will enter into force at the same time as a proposed consolidation of the existing Companies Act and International Business Companies Act. However, provision exists for the act to be brought into force piecemeal.
The interpretation provisions include a balance sheet and cashflow test of insolvency and the first comprehensive British Virgin Islands (BVI) law statutory definitions of concepts such as 'subsidiaries', 'holding companies' and 'groups'. They also introduces the concept of a 'shadow director'.
Although the set-off and netting provisions are short, their impact will be significant. Specified financial contracts will have their own regime based on International Swap Dealers Association model netting laws. In effect, netting agreements are valid in their entirety throughout insolvency.
Other set-off situations are dealt with by a provision substantially similar to Rule 4.90 of the English Insolvency Rules and conceptually do not represent a substantial change from existing BVI law. In practice, the way in which the exception to the availability of set-off (where the counterparty has notice of the BVI company's insolvency) is drafted should markedly increase the availability of set-off.
The new law introduces the concept of a transaction at undervalue and a separate avoidance provision for floating charges, and changes the law of preferences away from an 'intention to prefer' test. The introduction of the ability to unwind extortionate credit transactions will be of less impact. The combination of short vulnerability periods, a degree of stress on what a creditor can reasonably know about the affairs of the company and objective tests for 'safe harbours' mean that this should contribute to the BVI's reputation as a jurisdiction where certainty of transactions remains paramount.
Under the new legislation any person authorized by judicial or administrative insolvency proceedings in a relevant foreign country may apply to the BVI court for assistance. The court has an extremely wide discretion to hear such an application and may apply relevant foreign law. There are limits to the discretion and BVI laws protecting secured creditors and the primacy of BVI set-off and netting law cannot be subverted.
Other provisions based on the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency are not expected to come into force.
The act deals primarily with insolvent liquidations. Appointment is made either by the court or by a member and substantially the same provisions apply. Interim relief is available. Liquidators must be licenced insolvency practitioners. The role of the liquidator is to realize the assets of the company and distribute the proceeds among the creditors. Assets which are subject to security remain outside the scope of the liquidation. Once liquidation is terminated the company is dissolved.
Provision is made for insolvent companies to enter into voluntary arrangements with their creditors for satisfaction of their liabilities. A licensed insolvency practitioner will supervise implementation and there is no stay on enforcement.
Malpractice and Disqualification
Action can be taken against those who have been involved in trading wrongfully or fraudulently while a company is insolvent. Further, directors can be disqualified.
Insolvency practitioners must be licensed in the BVI and a supervisory regime has been set up. Only licensed practitioners can act as administrative receivers, administrators, liquidators or supervisors of creditors voluntary arrangements.
Administration is a court-driven breathing space during which rescue of the business (or a part of it), or an opportunity to dispose of assets more advantageously than would have been the case in a liquidation, can be attempted. The act borrows heavily from 1986 English legislation, but not from subsequent developments. An administrator is appointed by order of the court, which must be satisfied that the statutory grounds exist. The administrator takes control of the company and must formulate proposals for consideration by the company's creditors. If these are approved the administrator manages the company's business, assets and affairs in accordance with the proposals until either the purpose is achieved or the administrator is of the opinion that this is not possible.
Administration can be blocked by a secured creditor with the ability to appoint an administrative receiver. This is likely to increase significantly the use of floating charges in financing transactions using BVI companies.
The act represents a statutory codification and amendment to the law of receivers and introduction of the new concept of administrative receiver. The 'administrative receiver' is the receiver of the whole or substantially the whole of the business undertaking and assets of a company appointed by a floating charge holder (or in some circumstances by the court). For practical purposes receivers and administrative receivers are an out-of-court enforcement mechanism pursuant to a contractual power granted to a secured creditor.
For further information on this topic please contact Peter Tarn at Harney Westwood & Riegels by telephone (+1 284 494 2233) or by fax (+1 284 494 3547) or by email ([email protected]).