Insolvency law in the British Virgin Islands is almost entirely codified in the Insolvency Act 2003 and supplemented by the Insolvency Rule 2005. The Insolvency Act was modelled largely on the UK Insolvency Act 1986, but with a number of key differences. This update summarises its features.
Under BVI law a company will be deemed insolvent if it is cash-flow insolvent, balance-sheet insolvent or 'technically' insolvent (ie, it has failed to satisfy a judgment debt or statutory demand letter). Insolvency on any of these bases will enable a creditor to petition the court for the appointment of a liquidator, and may also have other consequences (eg, when a company is insolvent, directors owe their duties to the company's creditors and not its shareholders). A company may also voluntarily appoint a liquidator by passing a qualifying members' resolution.
Liquidation is a class right under BVI law and any petition must be advertised so that members of the class are given notice and may support or oppose the making of an order. If a liquidator is appointed, its primary duty is to collect in all of the company's assets and then distribute them pari passu to the company's creditors. The legislation confers on the liquidator wide powers to enable him or her to do so.
Once a liquidator is appointed, unsecured creditors cannot commence legal proceedings against the company without leave and any rights of action against the company are converted into claims in the liquidation process. Secured creditors generally do not participate in the liquidation process and may continue to proceed with any enforcement action directly against their collateral, pursuant to a valid security interest. A liquidator may disclaim onerous property and unprofitable contracts (although this cannot remove third-party rights once they have vested). BVI law provides for only a very small class of preferential creditors, which are rarely commercially significant in insolvent liquidations. Liquidation commences on the making of an order and does not relate back to the time of the petition.
When a company goes into insolvent liquidation, any mutual debts between the company and a creditor intending to prove in the liquidation will be offset. However, the right of set-off is not mandatory and can be waived by a creditor, provided that this does not prejudice other creditors. Any creditor which extended credit to the company when it had notice of the company's insolvency (excluding balance-sheet insolvency) cannot offset. The Insolvency Act has incorporated the International Swaps and Derivatives Association Model Netting legislation (pre-2007 form), so any contractual netting provisions relating to financial contracts will prevail over the statutory insolvency set-off provisions.
A liquidator may challenge transactions entered into in the twilight period before insolvency where such transactions constitute either an unfair preference, an undervalue transaction, a voidable floating charge or an extortionate credit transaction. In each case (except for extortionate credit transactions) the company must have been insolvent (excluding balance-sheet insolvency) at the time or the transaction must have caused it to become insolvent. The relevant vulnerability period is two years for connected persons or six months in all other cases. In each case, the statute contains relevant safe harbours to protect bona fide arm's-length transactions. Under BVI law it is unnecessary to demonstrate an intention to prefer to challenge a transaction as an unfair preference.
A liquidator can also pursue former directors (including shadow or de facto directors) and officers of the company for either misfeasance or insolvent trading. If the directors knew or ought to have concluded that a company could not avoid insolvent liquidation, the directors will be liable except to the extent that they took every step reasonably open to them to minimise loss to creditors. A liquidator can also pursue any person involved where the company has been engaged in fraudulent trading.
The Insolvency Act also regulates receiverships, including administrative receiverships. Under BVI law it is possible to appoint an administrative receiver pursuant to a floating charge over all or substantially all of a company's assets and undertaking.
Although the Insolvency Act also makes provision for administration orders, these provisions have not yet been brought into force. There was recent talk about potentially bringing them into force (the government's earlier position had been that they would never be brought into force), but it is unclear at this time what decision is likely to be taken. The provisions in the British Virgin Islands differ in some key respects from the UK legislation on which they were modelled. Administration orders may be blocked by the holder of a floating charge. An administration order creates a moratorium on enforcing claims against the company, including secured creditors' claims.
It is possible for an insolvent company to enter into a creditor's arrangement under a supervisor and thereby restructure the company's debts. Such arrangements cannot affect the rights of secured creditors or preferential creditors without their consent. Such arrangements have not yet proved popular in the British Virgin Islands.
The Insolvency Act also has two parts dealing with cross-border issues. Part 18 sets out the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency, although this has not been brought into force. Part 19 deals with orders in aid of foreign proceedings and broadly provides for the cooperation of the BVI courts in a foreign liquidation. Part 19 also contains an express qualification that assistance cannot be rendered in such a way as to interfere with the rights of a secured creditor under their security.
In order to act as a liquidator in an insolvent liquidation, an administrative receiver (but not a simple receiver), a supervisor of an arrangement or an administrator (if administration is ever brought into force), a person must be a licensed insolvency practitioner. The practitioner must be resident in the British Virgin Islands to obtain a licence. However, it is possible for a foreign insolvency practitioner to be appointed jointly with the BVI resident licensed insolvency practitioner.
For further information on this topic please contact Philip Kite at Harney Westwood and Riegels' London office by telephone (+44 207 842 6081) or email (firstname.lastname@example.org). Alternatively, contact Andrew Thorp at Harney Westwood and Riegels' Tortola office by telephone (+1 284 494 2233) or email (email@example.com). The Harneys website can be accessed at www.harneys.com.
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