Introduction
Facts
Decision
Comment
'Forum shopping' is the practice of choosing the most favourable jurisdiction in which to bring a claim. It is often used as a pejorative – a form of jurisdictional gamesmanship – but in principle, there is nothing wrong in seeking to have a case heard in the forum which is most favourable to the client. However, it can lead to some fierce jurisdictional battles, particularly in insolvency, where the choice between debtor and creditor-friendly procedures can be stark.
That is precisely the situation with which the British Virgin Islands Commercial Court has been wrestling over the past 10 months, in a series of liquidations of Pacific Andes Group subsidiaries. Is it best for a national court to decline to apply its own insolvency procedures in favour of another jurisdiction and, if so, in what circumstances?
Pacific Andes Resources Development Limited (PARD) is a public company incorporated in Bermuda and listed on the Singapore Stock Exchange. Pacific Andes International Holdings Limited (PAIH) is also incorporated in Bermuda and listed on the Hong Kong Stock Exchange, although trading in the shares is suspended.
At one time, the Pacific Andes Group was said to hold the 12th largest fishing fleet in the world. In July 2016, after several difficult years, PARD – along with its subsidiary, China Fisheries Group Limited and 14 other subsidiaries – filed for Chapter 11 protection. Substantial sums were involved, not least $650 million in unsecured loans to the club lenders. It is estimated that approximately $2.8 billion in value needs to be generated in order to repay the creditors and the equity holders.
The circumstances in which the group filed for Chapter 11 are noteworthy. According to the club lenders, in filing for Chapter 11, the Pacific Andes Group breached various undertakings and removed the chief restructuring officer appointed by agreement between the lenders and the group. In an audacious move, the group simultaneously filed for Chapter 11 protection in relation to 16 group entities, having deliberately concealed its intention from the lenders and the chief restructuring officer.
The group had no trading connection with New York or the United States in general. None of the debtors was incorporated in the United States, and the only asset in New York was the lawyers' retainer for the obtaining of the relief itself. There was no other connection with the United States, save for the group's desire to take advantage of the debtor-friendly environment. A fundamental principle of Chapter 11 is that the debtor remains in possession, therefore enabling it to retain management control while it formulates a plan for creditors. However, the club lenders had lost all confidence in the Chapter 11 debtors' ability to manage the business. Despite opposition from the group, the lenders succeeded in appointing a trustee in bankruptcy in the Chapter 11 proceedings.
In the meantime, one of the BVI entities, Pacific Andes Enterprises (BVI) Ltd, became the focus of an investigation in connection with allegations of trade finance fraud. The central allegation is that Pacific Andes Enterprises (BVI) Ltd falsified trading records in order to obtain trade finance. The BVI insolvency process does not involve the debtor remaining in possession. Instead, the BVI Insolvency Act provides for the appointment of liquidators if the creditor can demonstrate that the company is either cash flow or balance sheet insolvent, or that it is just and equitable to appoint a liquidator. The appointment of a liquidator is often – but not necessarily – the death knell of a company. The liquidator provides independent oversight and supervision of the company to obtain the best outcome for creditors which, in some rare circumstances, might include restoring the company to financial health.
However, the club lenders were faced with the problem that a Chapter 11 could be filed electronically from anywhere in the world. The club lenders therefore decided to apply for the appointment of provisional liquidators before the hearing of the full petition in order to hold the ring. The appointment of provisional liquidators would prevent the filing of Chapter 11 and ensure a level playing field at the time of the petition.
The tactic succeeded and provisional liquidators were appointed over Pacific Andes Enterprises (BVI) Ltd before the hearing of the petition. At the hearing, the group argued that a holistic restructuring was essential and that it was best for the restructuring to take place in the context of Chapter 11 rather than piecemeal under the supervision of a liquidator.
The group's submission was wholly rejected by the BVI Commercial Court judge. Apart from the fact that the companies were BVI entities regulated by BVI company law and it was therefore appropriate for the BVI courts to have jurisdiction over the companies, the appointment of a liquidator was not inconsistent with the Chapter 11 process. An independent officer of the court was not prevented from engaging in the Chapter 11 process if a holistic restructuring was planned which would result in value for the creditors. Indeed, since the appointment of liquidators over the various BVI entities, the liquidators FTI Consulting have kept a line of communication open with the Chapter 11 trustee, as noted in their latest report in April 2017.
Just as the newly adopted Judicial Insolvency Network Guidelines seek to set out a flexible procedure to assist cross border insolvency, the pragmatic approach of the BVI Commercial Court ensured that the rights of creditors were protected while recognising that international cooperation might be necessary and appropriate in the right circumstances. The form of order which was granted by the court permitted the liquidators to enter into international protocols and liaise with foreign insolvency officers, subject to the court's approval.
The two common themes running through the Pacific Andes Group company liquidations granted in the British Virgin Islands have been:
- the group's argument that the better outcome for all creditors would be a holistic restructuring plan and that the BVI Commercial Court should await the outcome of that restructuring under Chapter 11; and
- a lack of documentation to provide credible evidence that the companies were solvent.
As regards the first theme, the BVI Commercial Court has consistently held that it is a matter for the BVI court, as the place of incorporation, to regulate those companies which are insolvent or which otherwise should be regulated by a court-appointed officer, while recognising that the court-appointed liquidator should have the power to liaise with foreign insolvency proceedings if appropriate.
As for the second theme, this was particularly apparent in the application to appoint liquidators over one of PAIH's subsidiaries, Richtown Development Limited, in June 2017. The group described this as a treasury company. In similar fashion to Pacific Andes Enterprises (BVI) Ltd, provisional liquidators were appointed in order to prevent the company from filing for Chapter 11. The petition itself was brought by a related creditor company in liquidation. The application for the appointment of a liquidator was made on three grounds, namely that:
- Richtown was cash-flow insolvent;
- it was balance sheet insolvent; and
- the circumstances, once properly taken in account, would justify a winding up on just and equitable grounds.
Mr Justice Kaye QC held on June 2 2017 that the application succeeded on all three grounds. His findings relating to just and equitable winding up are of particular note.
A winding up petition on just and equitable grounds is a rare event, but as Justice Farara noted in Wang Zhongyong v Union Zone Management Limited (BVIHCMAP 2013 no 0024), it is "impossible to conceive of the plethora of circumstances and most undesirable to limit the categories" of claim where just and equitable winding up might be appropriate.
One of the reasons for which Kaye found that it was just and equitable to wind up the company was that there was a justifiable lack of confidence in the conduct and management of the company's affairs. The judge found that pursuant to Section 98 of the Business Companies Act 2004, the directors had a duty to maintain sufficient records to show and explain the company's transactions, and to allow the financial position of the company to be determined with reasonable accuracy.
Instead, the judge found that there was no explanation for the multiplicity of transactions and that the failure to maintain the documents, giving rise to an allegation of fraud, was serious misconduct on the part of the directors – thus satisfying the just and equitable basis. The judge emphasised that he was not making a finding of fraud on the part of the company, but in circumstances where the allegation of fraud had been circulating for some time, it was incumbent on the directors to make sure that they had sufficiently accurate records to provide to the court.
Therefore, where forum shopping is concerned, the British Virgin Islands are – to paraphrase Lord Denning – a good place to shop in. The pragmatic approach of the BVI Commercial Court ensures that, to the extent that a BVI company is affected by a Chapter 11 restructuring, the court-appointed liquidator has the power to liaise and agree protocols if the plan is likely to achieve value for the creditors. On the other hand, it demonstrates that the BVI Commercial Court will not merely delegate its supervisory powers. The power of the provisional liquidator to ensure a level playing field and prevent a company from entering into Chapter 11 is a useful protective power in the appropriate circumstances. Finally, the BVI Commercial Court has demonstrated that it will not shy away from placing a company into liquidation on just and equitable grounds if it is appropriate to do so, including a new category: where there has been a failure on the part of a director to maintain proper records.
For further information on this topic please contact Peter Ferrer at Harneys by telephone (+1 284 494 2233) or email ([email protected]). The Harneys website can be accessed at www.harneys.com.