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What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?
In order to apply to place a company into liquidation, a company must meet the insolvency test:
- cash flow insolvency – the company is unable to pay its debts as and when they fall due;
- balance sheet insolvency – the value of the company’s liabilities exceeds its assets; and
- technical insolvency – a company is taken to be insolvent (irrespective of its actual solvency) because:
- the company fails to comply with a valid statutory demand which exceeds the sum of US$2,000; or
- execution of a judgment or other order of a BVI court against it is returned wholly or partly unsatisfied.
A company, shareholder (if the court gives its permission) or a creditor can make an application to place the company into liquidation. However, no entities are explicitly barred from initiating these proceedings.
A provisional liquidator is appointed where the company’s assets are at risk before a liquidator is appointed. The court may appoint a provisional liquidator if:
- the company consents to the appointment;
- the court is satisfied that appointing a provisional liquidator is necessary to maintain the value of the company’s assets; or
- there are public interest reasons for doing so.
A company may be placed into voluntary liquidation if it:
- has no liabilities;
- can pay its debts as they fall due; and
- the value of its assets equals or exceeds its liabilities.
What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?
A company may be placed into liquidation by a resolution of its shareholders or by way of an order of the court under the provisions of the Insolvency Act 2003.
There are several different ways to commence liquidation proceedings in the British Virgin Islands. While not strictly required, a common method is for a creditor to serve a statutory demand seeking payment of an undisputed liability owed by the company which exceeds US$2,000. If this demand is not paid within 21 days of the statutory demand being served on the company’s registered address, the company is deemed to be insolvent.
A judgment creditor or the holder of a binding arbitration or a judgment award may seek to use the same procedure.
Provisional liquidationA provisional liquidator is a liquidator appointed to preserve a company’s assets where there is a real risk that between the filing of the application to appoint a liquidator and the making of an order to appoint a liquidator, the company’s affairs will not be properly conducted or its assets will be dissipated. An application to appoint a provisional liquidator may be made by a person who has made an application to appoint a liquidator, a creditor of the company, the company itself or a shareholder. To succeed in appointing a provisional liquidator the applicant needs to show that:
- there is an application before the court for a liquidator to be appointed;
- there is a good and arguable case that a ground to appoint a liquidator exists;
- there is a good and arguable case that the applicant has the standing to make the application; and
- the court should exercise its discretion to maintain the existing state of affairs regarding the company’s assets.
The voluntary liquidation process is governed by the Business Companies Act 2004. In order to place a company into voluntary liquidation, the directors must make a declaration of solvency and approve a liquidation plan. It is also necessary for the shareholders to approve the liquidation plan. The proposed liquidator must have consented to act. The directors or members (depending on the M&A) then will pass a resolution appointing the liquidator.
How are liquidation procedures formally approved?
A company’s liquidation commences when the liquidator is appointed by the court or shareholders. It does not date back to the date when the application was filed.
Provisional liquidationIt is for the High Court to appoint a provisional liquidator on any terms it thinks fit.
The directors must make a declaration of solvency and approve a liquidation plan. It is also necessary for the shareholders to approve the liquidation plan. The proposed liquidator must have consented to act. The directors or members (depending on the M&A) then will pass a resolution appointing the liquidator).
What effects do liquidation procedures have on existing contracts?
Contracts entered into prior to the commencement of the liquidation will not generally be affected by its liquidation, apart from:
- a liquidator may challenge transactions entered into by the company or disclaim contracts of onerous property;
- an application can be made by the liquidator to the court for an order rescinding a contract where the person is entitled to the benefit or subject to the burden of the contract made with the company; and
- contractual terms may automatically terminate or give another party the right to terminate a contract on liquidation.
What is the typical timeframe for completion of liquidation procedures?
The process of appointing a liquidator, from the date when the application is filed to the date the order is made, is normally completed within four to six weeks. Once an application to appoint a liquidator has been filed it must be determined by the court within six months (this period is extendable by the court). There is no limit on how long a liquidation can run for.
The appointment of a provisional liquidator ends on the appointment of a liquidator or upon the order of the court.
Ordinarily, most voluntary liquidations will be completed within 60 days of the date on which the voluntary liquidator is appointed. A voluntary liquidation must be completed within two years (this period is extendable by the court).
Role of liquidator
How is the liquidator appointed and what is the extent of his or her powers and responsibilities?
An insolvent liquidator can be appointed by either:
- the members resolving to appoint a liquidator; or
- an order of the court.
An insolvent liquidator is both an officer of the court and an agent of the company. The principal duties of a liquidator are:
- to take possession of, protect and realise the assets of the company;
- to distribute the assets or the proceeds of realisation of the assets in accordance with the Insolvency Act; and
- if there are surplus assets remaining, to distribute them, or the proceeds of realisation of the surplus assets, in accordance with the Insolvency Act.
The liquidator has the wide range of powers listed in Schedule 2 of the Insolvency Act. The court may limit these powers by providing that certain of them are to be exercised only with the sanction of the court.
A solvent liquidator will be appointed by the directors and members of the company.
A solvent liquidator’s duties are similar to those of the insolvent liquidator in that they are to:
- take possession of, protect and realise the assets of the company;
- identify all creditors of and claimants against the company and discharge these liabilities; and
- distribute any surplus assets to the members.
If the company is solvent, the liquidator should continually monitor the solvency of the company. However, if the liquidator considers that the company has become insolvent, they are required to convert it to an insolvent liquidation.
What is the extent of the court’s involvement in liquidation procedures?
In an insolvent liquidation:
- the court may appoint the liquidator and set their powers;
- the liquidator can approach the court for guidance in relation to any issues in the liquidation;
- the liquidator is required to seek court approval of their costs and expenses; and
- the liquidation will be terminated only by an order of the court.
The court should not be involved in a solvent liquidation.
What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?
In an insolvent liquidation:
- creditors can attend creditors’ meetings to have their voice heard by the liquidator in relation to the liquidation and the various proposals made;
- a creditors’ committee can be established with no fewer than three but no more than five creditor representatives;
- if the creditors of the company consider that the liquidator has failed to comply with their statutory duties to file a notice, or return any other document, the creditor can serve notice on the liquidator for them to remedy the default. If this is not remedied, the creditor can apply to the court;
- a creditor of more than 25% may apply for an order seeking to reduce the remuneration of a liquidator; and
- there are no prohibitions or restrictions on the rights of secured creditors to enforce their security during a liquidation, but no proceedings can be commenced against the company without leave of the court.
A company in voluntary liquidation should have no creditors.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in liquidation procedures?
Directors have a statutory obligation to cooperate with a liquidator:
- the directors may be required to prepare and submit a statement as to the affairs of the company;
- the directors may be required to deliver up all of the company’s property or documents within their control; and
- the directors may be examined under oath by the liquidator and examined by the court.
Shareholder involvement in an insolvent liquidation will be limited given that they do not have an economic interest in the estate, except where there may be returns to the estate exceeding creditor claims.
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