The Insolvency (Amendment and Consequential Provisions) Act 2004
was passed in July. The amendments were a necessary precondition to
the Insolvency Act 2003 Act, which came into force on August 16
2004.
As expected, the provisions adapted from the UNCITRAL model law
on cross-border insolvency will not come into force, nor will the
provisions relating to administration (a rehabilitation procedure
based on the English 1986 Act). Less expectedly, and contrary to
indications previously given, the intention is that provisions
relating to voidable transactions will not apply to any transaction
that took place before 16 August.
It is in the cross-border context (in the sense of BVI companies
with assets, liabilities and management outside the BVI) that the
legislation will have the most impact and be most seriously tested.
A BVI company can be the subject of all the insolvency regimes
provided for in the legislation, that is, liquidation,
administration, administrative receivership, and creditors'
arrangements, and they do not need to have any connection with the
BVI other than by virtue of their incorporation.
The absence of any moratorium in a creditors' arrangement will
restrict its use. The administration procedure has not come into
force. When it does, it will apply only to certain types of company
and will be emasculated by the use of floating charges.
Trust of assets
When a BVI company goes into liquidation in the BVI, its assets
become impressed with a trust for the benefit of those entitled to
them under the legislation as enunciated in Re Oriental Inland
Steam Company (1874) LR 9 Ch App 557. A liquidator's principal
duties, as set out in section 185(1) of the legislation, are to
realize the assets of the company and distribute them in accordance
with the legislation, which in effect creates this statutory
trust.
This principle is fundamental to the cross-border analysis
because, even if the assets are outside the BVI, BVI law maintains
that they fall within the scope of the liquidator's powers. In
practice, difficult conflict of laws questions arise if the company
disposes of assets after it goes into liquidation. The liquidator
may have to resort to the courts of the place where those assets
are situated to recover them, becoming subject to the
conflict-of-laws rules applied by those foreign courts.
Authority of liquidator to act abroad
As a matter of BVI law, the liquidator becomes the appropriate
person to deal with the company's assets in place of the directors,
but the recognition of his authority abroad is practically a matter
for the foreign courts. The English courts, in common with the
courts in many other common-law jurisdictions, will generally
recognize a liquidator of a foreign company appointed by the court
of the place of incorporation. The liquidator will be recognized as
having the authority to administer the assets of the company
worldwide. (The liquidator could also seek the assistance of the
English courts under s 426 of the UK Insolvency Act 1986.)
Submitting claims, set-off and netting of market
contracts
The provisions of the BVI legislation govern the submission of
claims to the liquidator and they apply regardless of where the
debt was incurred or what law governs it. The liquidator's power to
reject claims is also governed by BVI law. However, whether a debt
exists in the first place is a matter for the proper law of the
debt; liquidation does not affect questions of whether the debt has
been discharged or extinguished, it only affects the enforcement of
those debts. If the debts owed to a creditor are discharged under
its proper law after the company goes into liquidation, but before
payment of dividend, the liquidator can reject the claim because
the debt ceases to be a provable claim.
The provisions for pari passu distribution and set-off
are mandatory and must be applied by a liquidator in respect of any
creditor who submits a claim in the liquidation.
However, netting market contracts is effectively taken outside
the scope of insolvency set-off and pari passu distribution
under sections 434 and 435 of the Act, and these provisions are
also mandatory in the absence of fraud or misrepresentation so the
liquidator or the courts have no discretion to disapply them,
irrespective of where such contracts were entered into.
Position of secured creditors
The legislation expressly provides that liquidation does not
affect the rights of secured creditors to enforce their security
(Section 175(2)). The proper law of the instrument that creates the
security would govern the right of enforcement and the legislation
does not add to those rights or detract from them. Certain foreign
jurisdictions may impose limitations on the rights of secured
creditors to enforce their security in insolvency and, if the
assets over which the security is granted are situated there,
questions can arise as to whether the secured creditor is subject
to such limitations. A BVI court would probably regard this as a
matter for the lex situs but with the following
considerations: (a) the company cannot object to the enforcement on
any grounds of BVI law if the enforcement is in accordance with the
agreement by which the security was granted and that agreement is
valid; (b) if the company can be kept out of any insolvency process
in that foreign jurisdiction, it is questionable whether the
limitations could apply in the first place.
Receivership abroad
As well as being in liquidation in the BVI, the company may be
in receivership abroad, for example, if a secured creditor has
appointed a receiver in respect of the assets outside the BVI. The
assets that are subject to such security (and over which a receiver
has been appointed) will be outside the statutory trust of the
company's assets discussed above, and the costs and expenses
applicable to the receivership will in general be payable out of
the assets in the receivership.
Whether such a receiver is also an administrative receiver under
BVI law will depend upon whether the appointment satisfies the
legislation requirement (Section 142(1)), that is, that the
receiver was appointed by the holder of a floating charge over the
whole or substantially the whole of the business and assets of the
company, and is a licensed insolvency practitioner under the
legislation (an individual resident in the BVI holding a prescribed
licence from the BVI Financial Services Commission). If these
conditions are not satisfied, he will not have the status of an
administrative receiver under BVI law (even though he will be a
receiver under BVI law, and even though he may be an administrative
receiver under the law of some other jurisdiction, for example, the
UK). Nothing per se prevents a receiver appointed under an
English law governed floating charge being an administrative
receiver under the BVI legislation. However concerns over the
impact of the English Enterprise Act and (that if the purpose of
having an administrative receiver were to prevent, in the future,
the appointment of a BVI administrator) the technical point of
having to adduce English expert evidence as to the nature of the
charge at a hearing for an administration order suggests that BVI
law governed floating charges will become the norm. Where the
remainder of the security package is governed by a law that does
not have the administrative receiver concept it will be
essential.
Effect of concurrent foreign and BVI liquidations
If a BVI company has been wound up by a foreign court, it can
nevertheless be placed in liquidation in the BVI by either of the
two routes available, that is, the appointment of a liquidator by
the court or by the members.
In such situations, the liquidation of the company in its place
of incorporation (that is, the BVI) will generally be regarded as
the primary liquidation and, in common-law countries at least, all
others will be treated as ancillary liquidation where the
liquidator's powers are confined to collecting and distributing the
assets in that jurisdiction.
Other insolvency proceedings
If a BVI company is in liquidation abroad, it is not prevented
from entering into other insolvency regimes available under the
legislation, that is, administration, administrative receivership
or creditors' arrangement. But these regimes by themselves will not
negate the foreign liquidation of the company.
Assistance to a foreign representative under Part XIX
Part XIX of the Insolvency Act brings in a new regime for
judicial assistance in insolvency proceedings. It allows the
foreign representatives of certain types of insolvency proceedings,
that is, collective judicial or administrative proceedings in which
the property and affairs of the debtor are subject to control or
supervision by a foreign court (for example, liquidations) that
take place in designated territories to apply to the BVI courts for
assistance. (Section 466(1) - definition of foreign proceedings: it
is arguable that administrative receivership is not within the
ambit of this definition because it is not a collective proceeding
nor is the administrative receiver truly under the control or
supervision of the court.) The representatives who can apply for
such orders are persons authorized to administer the reorganization
or liquidation of the company's property or affairs or who are
authorized to act as representatives of the foreign insolvency
proceedings. The provisions are modelled on section 426 of the UK
Insolvency Act 1986, but with significant differences.
The BVI courts, when faced with such an application, will do
what will best ensure the economic and expeditious administration
of the foreign principles to the extent that is consistent with
certain guiding BVI principles, that is, the just treatment of all
persons claiming in the foreign proceedings; the protection of
persons in the BVI who have claims against the company against
prejudice and inconvenience when the claims are processed in the
foreign proceedings; the prevention of preferential or fraudulent
disposition of property; the need for distributions to claimants in
the foreign proceedings to be substantially in accordance with the
order of distributions in a BVI insolvency; and comity.
The orders that the BVI courts can make in aid of the foreign
proceedings are extremely wide and include: restraining
proceedings; orders requiring a person to deliver up the property
of the company to the foreign representative; orders to facilitate
the co-ordination of insolvency proceedings in the BVI with the
foreign insolvency proceedings; and authorizing the foreign
representative to examine any person who could be examined in BVI
insolvency proceedings.
However, secured creditors are protected in that the legislation
specifically provides that these orders will not affect the rights
of secured creditors to take possession of and realize the property
over which they have security.
It seems that the provisions are wide enough for the BVI courts
to render not merely procedural assistance but also to apply
substantive principles of BVI insolvency law. The BVI court has
discretion whether to apply the law of the BVI or the law that
applies to the foreign proceedings. However, set-off and
preferential creditors are protected from this provision in that
court orders that affect the right of any creditor to benefit from
the set-off provisions in Section 150 of the legislation, or result
in a preferential creditor receiving less than they would under a
BVI insolvency, cannot be made without the consent of such
person.
Apart from the statutory provisions, a liquidator appointed
under a foreign liquidation may apply to the BVI courts for relief
on behalf of the company in liquidation and the BVI courts will
recognize his title.