So far so good
19 June 2006
22 August 2013
22 August 2013
10 February 2014
3 December 2013
FCA review of Client Assets Regime: radical proposals for the speedy return of cash and assets on insolvency
19 August 2013
Before the enactment of the British Virgin Island's (BVI) Insolvency Act in 2003, the BVI relied on a combination of sections of the Companies Act, BVI local case law and parts of the English Insolvency Rules 1986 for its insolvency framework.
The complexity of contentious insolvency proceedings and the continued use of BVI companies in large structures meant that the single code for insolvency law in the act was most welcome.
Three years later, the impact of the act and BVI Insolvency Rules are far reaching and have assisted in advising both lenders and borrowers.
The act was largely based on the English Insolvency Act 1986, but it is fair to say that the new act was a considerable improvement on the 1986 Act as well as being tailored to the needs of the BVI as the world's largest offshore provider of companies. There are also some significant differences for the unwary.
For insolvent companies, a one-track liquidation system was introduced with two entry points: the passing of the requisite resolution by shareholders; and by applying to the court for the appointment of a liquidator, most commonly by unpaid creditors.
Of note was the requirement in both cases for a locally resident and licensed insolvency practitioner and the establishment of the Official Receivers' (OR) office.
The BVI welcomed the appointment of an experienced ex-Ernst & Young insolvency partner as its first OR. Regulation has been stringent, but sensible and, interestingly, has led to a number of accounting firms either beefing up their insolvency practices or setting up in the BVI.
The BVI now has almost all the familiar accountancy names. This is welcome and supports the concept of the act having local insolvency practitioners primarily responsible for BVI companies.
Overseas practitioners are allowed under the act as joint appointees, but notice of their qualifications must be sent to the OR who has the opportunity to object. It should be noted that the OR rightly prefers accountants who commonly take appointments and who are licensed in their own countries rather than, say, lawyers specialising in insolvency litigation.
Voluntary liquidation procedures are simple and clear, with most BVI firms now having experience and, importantly, precedents for them. The cost, therefore, is now quite modest. Court liquidation process generally follows the practice from before the act, but it has been extremely useful to have a clear, codified regime. Court procedures are also dealt with quickly, especially in the light of the six-month time limit on applications, default of which is an automatic dismissal. This rather harsh rule can be mitigated by an extension from the court and the court has been willing to extend the time as long as an application is made before the six months.
A proper and comprehensive regime for receivership was most welcome and has been used a number of times. For example, in two recent receiverships, a successful sale of assets meant significant recoveries by lenders. This may not have been possible before the act, and the out-of-court nature of receivership has both protected value and limited publicity. In the latest receivership this was vital for protecting a household name. The receivership provisions are largely based on the 1986 Act and this has assisted advice to UK law firms and accountants. The act also solved a few unsettled issues in the 1986 Act, for example by including a provision that different holders of floating charges can appoint an administrative receiver, but only one can act.
Set-off and netting
Specific and clear rules certainly assist advice to overseas professionals and financial institutions. In particular, the act provides for specified financial contracts to have their own regime based on ISDA model netting laws that, put simply, means continued #+ continuedthat netting agreements are validated in their entirety through insolvency. This is, of course, welcome and has provided a much safer environment to lend for derivative transactions.
Other set-off situations are dealt with by a provision similar to UK 1986 Insolvency Rule 4.90. In practice, unless a counterparty has notice of insolvency, set off is available.
The act provides a comprehensive code on which to advise in this area. Although using familiar terms to those in the 1986 Act, there are important differences, again designed to be creditor, rather than debtor friendly. These differences include a move away from the 'intention to prefer' cases, which occupied much English court time, to a simple test based on the effect of a transaction. It is too early for these concepts to be the subject of BVI case law but the clarity of the law has certainly helped transaction advice and lenders are attracted to the relatively short vulnerability periods.
Malpractice and disqualification orders
Again, although it is too early for the BVI courts to consider this area of the act (again based largely on the 1986 Act provisions) the writer has detected some softening of debtor company's positions in court liquidation applications, perhaps due to advice on the increased powers of liquidators and an active OR's office. The provisions include fraudulent and insolvent trading, and misfeasance. The court has extensive powers which can be used against directors and shadow directors.
Despite being part of the act in 2003, the administration provisions have not yet been brought into effect. This status quo is not unpopular with lenders, despite the requirement that holders of floating charges be given notice to enable them the opportunity of a blocking administrative receiver. If and when this comes into force it is thought that it will not be of general application. However, 'lightweight' floaters, which are specifically recognised in the act, should be sufficient to allow a blocking appointment and lenders would be wise to ensure they have the required protection.
Interaction with the UK's Enterprise Act
The near-simultaneous passing of the Enterprise Act and the BVI Insolvency Act was co-incidental. The BVI is most unlikely to follow the more debtor-friendly Enterprise Act. Although perhaps a slightly simplistic assessment, while the act provides for administrative receivership, the Enterprise Act restricts this area, for example with the 'top-slicing provisions' in Section 251, which are an obvious erosion of floating charge holder rights.
These differences may allow an opportunity for lenders to circumvent some of the provisions in the Enterprise Act, in the common case where a BVI company has its assets and liabilities in the UK. There is a long tradition of the English courts giving effect to the powers and privileges of foreign insolvency appointees and it is highly possible that the English courts would extend this to an appointee under a BVI law-governed floating charge. If this is the case, then it is possible for a BVI receiver, appointed under a BVI floating charge, to block a UK administration.
It is so far so good for the Insolvency Act with no major problems having surfaced, mainly as the draftsman used the 1986 Act model and took into account many of the problems which had arisen in the UK. n
Phillip Kite is head of the litigation and insolvency department at Harneys