The British Virgin Island’s Commercial Court has recently delivered a decision in Western Union International Limited v Reserve International Liquidity Fund Ltd which addresses the issue of when during the redemption process a redeeming investor becomes a creditor of the fund and is therefore entitled to apply for the appointment of a liquidator.

The British Virgin Islands Commercial Court has recently delivered a decision in Western Union International Limited v Reserve International Liquidity Fund Ltd which addresses the issue of when during the redemption process a redeeming investor becomes a creditor of the fund and is therefore entitled to apply for the appointment of a liquidator.

QUESTIONS AND ANSWERS  

Q1. Is it possible to appoint a receiver over assets which have been charged by a British Virgin Islands (‘BVI’) company (a ‘Company’) under a security document?

A1. Yes, provided that the security interest which has been granted by the Company to the beneficiary (the ‘mortgagee’) over the Company’s assets allows the mortgagee to appoint a receiver. Appointing a receiver is probably the most common way of enforcing security interests granted by Companies.  

Yesterday, the ECSC Court of Appeal set aside the winding up order made in the case of Westford Special Situations Fund Ltd. v. Barfield Nominees Limited and another, and dismissed the Joint Liquidators appointed over the fund.

Westford was put into liquidation earlier this year by shareholders whose application was based on their entitlement to unpaid redemption proceeds. At first instance the application was allowed and Joint Liquidators were appointed over the Fund on two grounds:-

The First Creditor Driven Schemes

The Commercial Court has very recently sanctioned four schemes of arrangement pursuant to section 179A of the BVI Business Companies Act 2004. These were the first two creditor-driven schemes to be proposed and sanctioned in the BVI. There has been one other scheme proposed and sanctioned in the BVI but this was a member’s scheme and was altogether more straightforward. Ogier BVI was instructed in relation to all four schemes.

The First Scheme

Liquidators were appointed over Fairfield Sentry Limited, Fairfield Sigma Limited and Fairfield Lambda Limited (together “the Funds”) by orders of the BVI High Court dated 21 July 2009, 21 July 2009 and 23 April 2009 respectively. Fairfield Sentry Limited was the largest “feeder” fund to Bernard L Madoff Investment Securities LLC (“BLMIS”) and invested approximately 95% of its assets with BLMIS. BLMIS was placed into liquidation proceedings in the United States in December 2008, after it was revealed that Bernard Madoff operated BLMIS as a Ponzi scheme for many years.

As well as issuing claims in mistake and restitution in the BVI Commercial Court and the US State Supreme Court, the liquidators of Fairfield Sentry Limited (“the Fund”) also petitioned for and, on 22 July 2010 obtained, Chapter 15 recognition in the United States Bankruptcy Court for the Southern District of New York.

On 15 September 20091 the judge responsible for the Lehman bankruptcy proceedings in the United States held that Metavante Corporation (“Metavante”) could not rely on Section 2(a)(iii) of the ISDA Master Agreement to suspend payments to Lehman Brothers Special Financing, Inc. (“LBSF”). Specifically, Judge Peck held that the safe harbour provisions in the US bankruptcy code protected a non-defaulting party’s contractual rights to liquidate, terminate or accelerate swaps and to net termination values but did not provide a basis to withhold performance under a swap if it did not terminate.

New ground was broken last December in the British Virgin Islands when what is believed to be the first scheme of arrangement procedure under the BVI Business Companies Act, 2004 (BCA) was completed.

In the scheme of arrangement Amber Petroleum Ltd (Amber) completed a successful reverse takeover of AIM-listed AfNat Resources Limited (formerly Lithic Metals and Energy Limited) (AfNat) under section 179A of the BVI Business Companies Act, 2004 (BCA).

A recent decision from the Commercial Court of the British Virgin Islands has clarified the position of a redeemed shareholder of a fund who has a claim for redemption proceeds which have become due and payable. In the matter ofWestern Union International Limited v Reserve International Liquidity Fund Ltd., the court considered the status of a redeemed shareholder both before and after the commencement of the liquidation of a fund and the operation of Section 197 of the Insolvency Act, 2003 (the “Act”). Section 197 states that: