Introduction
Liquidation
Receivers in general
Administrative receivership


Introduction

Corporate insolvency in the British Virgin Islands is governed by the Insolvency Act 2003 (as amended) and the Insolvency Rules 2005 (as amended). These laws are closely based on the English Insolvency Act 1986. While there are a number of insolvency regimes available, the provisions for administration are not yet in force.

These provisions for administration are similar to the provisions of the English Insolvency Act 1986 prior to its amendment by the Enterprise Act 2002 and promote the rescue of companies in financial difficulty assisted by a statutory moratorium. There are also separate provisions for insurance companies.

Currently, the key procedures are:

  • liquidation;
  • receivership;
  • administrative receivership; and
  • creditor arrangements.

This article is the first in a series on restructuring and insolvency in the British Virgin Islands and focuses on the key procedures of liquidation, receivership in general and administrative receivership specifically.

Liquidation

A liquidator is appointed for the purpose of collecting in and realising the assets of a company and distributing the proceeds of realisation to creditors. Liquidation marks the end of a company's business and does not have a rescue function. If the liquidation is a solvent liquidation, it is governed by the provisions of the BVI Business Companies Act 2004 (as amended). If the liquidation is an insolvent liquidation, it is governed by the Insolvency Act 2003 (as amended) and the liquidator must be either the official receiver in the British Virgin Islands or a BVI licensed insolvency practitioner. An individual who is resident outside the British Virgin Islands may be appointed to act as liquidator jointly with a BVI licensed insolvency practitioner or the official receiver. Liquidation may be commenced by the BVI court or by shareholders' resolution. The BVI court also has jurisdiction to appoint a liquidator over a foreign company which has a connection with the BVI. Connection is defined as the presence of assets or the carrying on of business in the British Virgin Islands or if there is a reasonable prospect that the appointment would benefit creditors.

Liquidation by BVI Court
Proceedings are brought in the Commercial Court of the British Virgin Islands. An application may be made by:

  • a creditor;
  • the company;
  • its shareholders;
  • the International Tax Authority;
  • the attorney general; or
  • the Financial Services Commission.

The grounds for appointment are that:

  • the company is insolvent;
  • it is just and equitable that the company be wound up; or
  • it is in the public interest to wind the company up.

Only the attorney general, the International Tax Authority or the Financial Services Commission may apply in the public interest.

The most common ground is insolvency. Insolvency may be established by showing any of the following:

  • a failure to comply within 21 days with a statutory demand for an undisputed debt exceeding $2,000;
  • execution issued on a judgment being returned unsatisfied;
  • balance sheet insolvency; or
  • an inability to pay debts as they fall due.

The court may, on application, appoint a provisional liquidator to protect assets pending the making of the winding-up order. The provisional liquidator has powers to the extent necessary to maintain the value of the assets of the company or to carry out the functions for which he was appointed. Importantly, following the decision in Constellation Overseas Ltd (BVIHC COM 2018/206), a "light-touch" or "soft-touch" provisional liquidator can be appointed in aid of restructuring.

Insolvent members' liquidation
As an alternative to the BVI court appointment of a liquidator, the members of an insolvent company may, by a majority of 75% (or higher if required by the company's constitutional documents) of the votes of those present and voting, pass a resolution appointing an eligible insolvency practitioner as liquidator of the company. The winding-up commences at the time of appointment of the liquidator.

Solvent voluntary liquidation
Subject to the provisions of the memorandum and articles of association of the company, the voluntary liquidation of a solvent company may be commenced by the appointment of the liquidator by either a resolution of members or a resolution of directors. The process is only available to BVI registered companies. The winding-up again commences at the time of appointment of the liquidator.

Effects of liquidation
The purpose of a liquidation is to realise the company's assets and distribute the proceeds of realisation to creditors. On appointment, the liquidator takes custody and control of the company's assets and the directors' powers effectively cease (although they remain in office). Unless the BVI court otherwise orders, there is a stay against creditor action, proceedings may not be commenced by or against the company and shares in the company may not be transferred. Secured creditors remain able to enforce their security rights. No amendments can be made to the memorandum and articles of association of the company, and members cannot exercise their rights under those documents.

Liquidator
The liquidator of an insolvent company must be an "eligible insolvency practitioner". This means that they must be a BVI-licensed insolvency practitioner. An overseas practitioner who is not BVI-licensed may be jointly appointed with a BVI-licensed insolvency practitioner. The liquidator has wide ranging powers including the power to sell the company's property and to borrow money and grant security over assets. The liquidator calls a meeting of creditors and a creditors' committee may be appointed. The liquidator is subject to the control of the court.

A liquidator appointed in relation to a solvent voluntary liquidation must have certain experience or qualifications and, since changes in law were brought in on 1 January 2023, must satisfy a BVI residency requirement in that they must have lived physically in the British Virgin Islands for at least 180 days before their appointment. Where joint liquidators are appointed, only one needs to satisfy the BVI residency requirements. Liquidators appointed in relation to a solvent voluntary liquidation before 1 January 2023 can continue to act until the liquidation is concluded, without the need to satisfy the BVI residency requirements.

Creditor claims
Creditors submit claims in writing to the liquidator. The submission of such claims may amount to a submission to the jurisdiction of the BVI court. Where the liquidator issues a notice of their intention to declare a distribution, any creditor who has not submitted a claim by the date specified is excluded from the distribution. The liquidator adjudicates the claim and if they reject it, they must provide written reasons. Once all the company's assets have been realised and distributed, any surplus is returned to shareholders. The liquidator prepares a final report for creditors and members. The company is then dissolved.

Priority of payments
The proceeds of realisation of assets are paid in the following order of priority:

  • the proceeds of sale of charged assets are paid to secured creditors; and
  • unsecured assets are applied in the following order of payment:
    • the costs of the liquidation and liquidator's remuneration;
    • preferential creditors; and
    • unsecured creditors.

The categories of preferential creditors are as follows:

  • the BVI Social Security Board in respect of employee's contributions deducted from the employee and employer's contributions for the six months prior to the winding-up (unlimited);
  • the BVI government for taxes and other sums due to it up to a maximum of $50,000;
  • the Financial Services Commission for any unpaid fees or penalties up to a maximum of $20,000; and
  • employees claims for wages for the six months prior to the winding-up (capped at $10,000), employees' entitlements to social security contributions for six months and pensions contributions for twelve months (capped at $5,000 per employee).

Registered charge holders will rank according to the registration of their security interest at the BVI Registry of Corporate Affairs. Other creditors within each category rank pari passu.

Any surplus assets are distributed to the members in accordance with their rights and interest in the company.

Creditors with retention of title and other proprietary claims remain entitled to their assets. There is a statutory set-off applying to mutual credits and debits and other mutual dealings between the company and its creditors.

Completion of liquidation
Once the liquidation is complete, the liquidator prepares a final report which is sent to all creditors and members and filed with the BVI Registrar of Corporate Affairs. The company will then be struck from the register of companies in the British Virgin Islands and dissolved.

Receivers in general

Receivership is not a collective insolvency procedure as its primary aim is the satisfaction of debts owed to the secured creditor.

Appointment
A receiver may be appointed out of court by the holder of the security document, or they may be appointed by an order of the BVI court.

The appointment of a receiver out of court is governed by strict notice provisions set out in section 139 of the Insolvency Act 2003 (as amended).

Further, whether appointed out of court or by the BVI court, a receiver must forthwith give notice of their appointment to the company and to the BVI Registrar of Corporate Affairs and, if the company is a regulated person, to the Financial Services Commission. The receiver must also advertise their appointment in newspapers within five business days and send a notice of their appointment to all creditors within twenty-eight days.

Qualifications and powers
An ordinary receiver (as opposed to an administrative receiver) need not be a BVI-licensed insolvency practitioner.

The powers of a receiver are to be found in the charge document and/or the BVI court order appointing the receiver. Subject to those sources, a receiver is empowered by statute to demand and recover income of the assets over which they were appointed, to manage, maintain and repair those assets, and to exercise a right to inspect books and documents relating to those assets, which are in the possession or control of a person other than the company.

Duties
The receiver's primary duty is to exercise their power in good faith and for a proper purpose, and in the best interests of their appointor. Subject to that primary duty, they shall have reasonable regard to, amongst others, the interests of the creditors. They also owe a duty to manage the charged property with due diligence. If they exercise a power of sale, they owe a duty to, among others, the creditors, to obtain the best price reasonably obtainable at the time of sale.

Effect of appointment of receiver
The appointment of a receiver does not affect the corporate existence of a company, although the directors are divested of authority in respect of property covered by the appointment. The company remains liable on its existing contracts.

A receiver acts as the agent of the company, not the agent of the receiver's appointor. A receiver is personally liable on any contract entered into in performance of their functions and for certain liabilities under contracts of employment adopted by them after fourteen days of appointment. The receiver will be entitled to an indemnity out of the assets of the receivership for these liabilities.

Duty to report
A receiver must prepare accounts of their receipts and payments covering the first 12 months of their appointment and each subsequent 6 months, and on cessation of their appointment.

Termination of receivership
The receivership will terminate when the assets have been fully realised and distributed. Depending on how much is realised, this may or may not result in the appointor being fully repaid and an account being made to subordinate creditors.

On completion of the receivership, the receiver must give notice:

  • to the company;
  • if the company is or has been a regulated person, to the Financial Services Commission and then file a notice of completion of the receivership with the BVI Registrar of Corporate Affairs; and
  • if the company is or has been a regulated person, to the Financial Services Commission.

Administrative receivership

An administrative receiver is a receiver appointed by the BVI court or the holder of a debenture or other instrument of the company secured by a floating charge, over the whole or substantially the whole of the business, undertaking and assets of a company.

Qualifications and powers
An administrative receiver must be a BVI-licensed insolvency practitioner.

An administrative receiver has, in addition to the powers of an ordinary receiver, the power to execute documents on behalf of the company and to use the company seal, and the powers set out in schedule 1 of the Insolvency Act 2003 (as amended). These include the power to carry on the company's business, to sell its assets, and to commence legal proceedings on its behalf. An administrative receiver may also apply to the BVI court for authority to sell assets subject to prior ranking security provided that the secured creditor is paid out of the net proceeds. A person dealing with an administrative receiver in good faith and for value is not concerned whether the administrative receiver is acting within its powers.

Duty to report
In addition to the accounts required of an ordinary receiver, an administrative receiver must, within three months of their appointment, prepare and file with the BVI Registrar of Corporate Affairs and, if appointed by the BVI court, the BVI court, a report as to various matters. These matters include:

  • the proposed disposal of any assets;
  • the amounts owed to their appointor to preferential creditors; and
  • the amount available to other creditors.

For further information on this topic please contact Christian Burns-Di Lauro at Ogier by telephone (+44 1534 514000) or email ([email protected]). The Ogier website can be accessed at www.ogier.com.