Recognition and Assistance of Foreign Insolvency Officeholders in...

BVI Liquidator of a Foreign Company

A BVI-licensed insolvency practitioner may be appointed as a liquidator of a foreign company if the court is satisfied that the company has a connection with the BVI and, among other things, the company is insolvent or it has been dissolved or has otherwise ceased to exist under or by virtue of the laws of the country in which it was last registered. A foreign company has a connection with the BVI only if:

1. it has or appears to have assets in the BVI (usually shares in BVI subsidiaries); or
2. there is a reasonable prospect that the appointment of a liquidator of the company under Part VI will benefit the creditors of the company.

Foreign Liquidator of a BVI Company

An individual resident outside the BVI may be appointed to act as an insolvency practitioner jointly with a BVI-licensed insolvency practitioner, subject to certain conditions being met as to eligibility and notice.

Provisional Liquidation

Where an application for the appointment of a liquidator of a company has been filed but not yet determined or withdrawn, the court may appoint a provisional liquidator of a company if:

1. the company, in respect of which the application to appoint a liquidator has been made, consents; or
2. the court is satisfied that the appointment of a provisional liquidator is necessary for the purpose of maintaining the value of assets owned or managed by the company.

An application for the appointment of provisional liquidators involves a two-stage test. The first and threshold stage is to consider whether the applicant has demonstrated that it is likely to obtain an order appointing liquidators on the hearing of the application (i.e., it is likely that the company is insolvent). The second stage is to consider whether, under the circumstances of the particular case, it is — as a matter of judicial discretion — right that a provisional liquidator should be appointed pending the hearing of the substantive application for the appointment of liquidators.

“Light Touch” Provisional Liquidation

In Re Constellation Overseas Ltd. [1], the court held that it has jurisdiction to appoint “light touch”; provisional liquidators. The essence of a light-touch provisional liquidation is that a company remains under the day-to-day control of the directors but is protected against actions by individual creditors. The purpose is to give the company the opportunity to restructure its debts, or otherwise achieve a better outcome for creditors than would be achieved by liquidation. It may be appropriate where there is no alleged wrongdoing of the directors.

The applicants in Re Constellation Overseas Ltd. were six BVI companies that formed part of a group of companies. The companies were subject to a court-supervised Judicial Reorganisation in Brazil under which the officers of the debtor companies continued to administer the affairs of the companies under the supervision of the Brazilian court. They had also commenced ancillary proceedings in the U.S. for protection under chapter 15 of the U.S. Bankruptcy Code on the basis that New York law governed the vast majority of the companies’ debt. The application was supported by creditors holding more than US$1 billion of the companies’ debt of US$1.5 billion, including the companies’ largest unsecured creditor.

The following additional principles emerge from the court’s judgment in Re Constellation Overseas Ltd.:

1. A company’s own application for the appointment of provisional liquidators has always been treated more favorably than that of a creditor. If the company itself makes, consents to, or is shown not to oppose the application, the appointment is almost a matter of course;
2. However, it is necessary to show at least some prospect of promoting a restructuring.

Recognition of Foreign Insolvency Proceedings Generally

The BVI legislation implementing the UNCITRAL Model Law on Cross Border Insolvency has never been brought into force. Accordingly, it is not possible to obtain an order for general recognition of the appointment of foreign officeholders with the effect that foreign officeholders then have all the powers of BVI appointed liquidators.

Orders in Aid of Foreign Proceedings

However, a foreign representative may apply to the court for an order in aid of foreign proceedings in respect of which he is authorized. “Foreign proceeding” means a collective judicial or administrative proceeding in a relevant foreign country. The current list of relevant foreign countries designated by the Commission includes nine jurisdictions, namely Australia, Canada, Finland, Hong Kong, Japan, Jersey, New Zealand, the U.K. and the U.S. [2]

Importantly, any order made in aid of a foreign proceeding must not affect the right of a secured creditor to take possession of and realise or otherwise deal with property of the debtor over which the creditor has a security interest. In making an order, the court may apply the law of the BVI or the law applicable in respect of the foreign proceeding.

The Guidelines

The BVI court has adopted the Judicial Insolvency Network’s Guidelines for Communication and Cooperation Between Courts in Cross-Border Insolvency Matters (the “Guidelines”). Other jurisdictions to have adopted the Guidelines include:

1. The U.S. Bankruptcy Court for the District of Delaware;
2. The U.S. District Court for the Southern District of New York;
3. The U.S. Bankruptcy Court for the Southern District of Florida; and
4. The U.S. Bankruptcy Court for the Southern District of Texas.

The overarching objective of the Guidelines is to improve the efficiency and effectiveness of cross-border proceedings relating to insolvency or the adjustment of debt matters opened in more than one jurisdiction by enhancing coordination and cooperation among courts under whose supervision such proceedings are being conducted.

The Guidelines allow for the recognition and acceptance of orders made by foreign courts, and of the laws, regulations and practices of general application relating to proceedings in other jurisdictions. The process is voluntary, but once the parties enter into a protocol that is approved by the court, they will be required to conduct themselves in the continuing litigation in accordance with the terms of the protocol.