On April 17 the government of the British Virgin Islands (BVI) passed the long-awaited 2003 Insolvency Act. It is not clear when the Act will come into force but there is some indication that large parts of the legislation will become effective at the same time as a proposed consolidation of companies' legislation. However, a number of parts may well be brought into force in the very near future.
The Act has obviously been drafted very much with the concerns of international financial institutions in mind although an administration procedure is introduced, as well as the possibility of restructuring using voluntary arrangements. Issues of market certainty such as netting are comprehensively dealt with and the inevitability of cross-border elements has been coherently addressed. The Act clearly owes much to the UK's 1986 legislation but represents a more streamlined approach. The Act also recognizes the fundamental importance of capital market transactions to the BVI and does not adopt changes made to the English legislation since 1986.
The Act contains the first comprehensive statutory BVI law definitions of subsidiaries, holding companies and groups and also introduces the shadow director concept. A definition of insolvency, which specifically includes a balance sheet and cash flow test, puts to rest an argument that only a cash flow test applies.
The Act introduces transactions at an undervalue, a separate avoidance provision for floating charges, and a change in the law of preferences away from an intention to prefer test. The combination of short vulnerability periods, a degree of emphasis on what a creditor can reasonably know about the affairs of the company and objective safe harbours mean that the Act should contribute in no small way to the BVI's reputation as a jurisdiction where certainty of transactions remains paramount.
Set-off and netting
Specified financial contracts have their own regime based on the International Swaps and Derivatives Association model netting law and in effect netting agreements are validated in their entirety through insolvency.
Other set-off situations are dealt with by a provision substantially similar to rule 4.90 of the English Insolvency rules and conceptually do not represent a substantial change from existing BVI law. In practice, the way in which the exception to the availability of set-off (where the counterparty has notice of the BVI company's insolvency) is drafted should markedly increase the availability of insolvency set-off and certainty that this will be the case.
Cross border elements
Any person authorised by judicial or administrative insolvency proceedings in a relevant foreign country may apply to the BVI court for assistance. The court has an extremely wide discretion on hearing such an application and may apply relevant foreign law. There are limits to that discretion and BVI laws protecting secured creditors and the primacy of BVI set-off and netting law cannot be subverted.
Other provisions based on the United Nations Commission on International Trade Law model cross-border insolvency law are not expected to come into force in the foreseeable future.
The Act deals primarily with insolvent liquidations. Appointment of a liquidator is either by the court or a member and substantially the same provisions apply. Interim relief is available. Liquidators of insolvent companies must be licensed insolvency practitioners. The role of the liquidator is to take control of the assets of the company and distribute realizations. Assets that are subject to security remain outside the scope of the liquidation. Following termination of the liquidation, the company is dissolved.
BVI administration is a court driven breathing space during which rescue of the business (or a part of it) or an opportunity to dispose of assets more advantageously than would have been the case in a liquidation can be attempted. An administrator is appointed by order of the court that must be satisfied that the statutory grounds exist. The administrator takes control of the company and must formulate proposals for consideration by the company's creditors. If these are approved the administrator manages the company's business, assets and affairs in accordance with the proposals until the purpose is achieved or the administrator is of the opinion that it cannot be.
A secured creditor, who has the ability to appoint an administrative receiver, can block administration. This is likely to increase significantly the use of floating charges in financing transactions using BVI companies.
The Act represents a statutory codification and amendment to the law of receivers and introduction of an administrative receiver, a new concept in the BVI. The administrative receiver is receiver of the whole or substantially the whole of the business undertaking and assets of a company appointed by a floating charge holder (or in some circumstances by the court). For practical purposes receivers and administrative receivers are an out of court enforcement mechanism pursuant to a contractual power granted to a secured creditor.
Provision is made for insolvent companies to enter into voluntary arrangements with their creditors for satisfaction of their liabilities. A licensed insolvency practitioner supervises implementation and there is no stay on enforcement.
Malpractices and disqualification
Provision has been made for taking action against those who have been involved in trading wrongfully or fraudulently whilst a company is insolvent and for the disqualification of directors.
Insolvency practitioners must be licensed in the BVI and a supervisory regime has been set up. Only licensed practitioners can act as administrative receivers, administrators, liquidators or supervisors of creditors' voluntary arrangements.