INTRODUCTION
This chapter deals with the insolvency laws of the British Virgin Islands (‘BVI’) in so far as they relate to multinational liability in a family or enterprise of companies incorporated in the BVI. It is essential to an understanding of this topic to know how BVI companies are used in the context of a family of companies.
The BVI is an offshore financial centre located to the east of Puerto Rico. The Territory is the home of over 700,000 international business companies incorporated under the provisions of the International Business Companies Act (‘IBC Act’). The majority of these companies are still active, and of the active companies more than 99% operate outside the BVI and have no real connection to the BVI other than that this is where they are registered and have their legal office. Inevitably, a small percentage of these companies have insolvency problems and need to be restructured or liquidated under the laws of their domicile: the BVI.
Prior to 2003 the corporate insolvency laws of the BVI were contained in the Companies Act which provided only one remedy for insolvent companies: liquidation. There were no provisions for restructuring an insolvent company, nor for allowing it to trade out of its difficulties. This law was in dire need of a major overhaul, which came in the form of the Insolvency Act 2003 (‘the Act’) which provides a comprehensive scheme for dealing with insolvent companies and individuals. The Act is supplemented by the Insolvency Rules 2005 (‘the Rules’).
The insolvency laws of the BVI now consist of the Act, the Rules, and decided cases of the courts of the BVI, England, other Commonwealth countries, and other countries (including the US), in that order of preference. Relevant decisions of foreign courts are considered and followed by the BVI courts if they are not based on a foreign statute, and are not inconsistent with a decision of a local court of equal or higher jurisdiction.
It is a common feature of a family or enterprise of companies to include one or more BVI companies in the family structure, the other members of the family being incorporated in other jurisdictions. The assets owned by the members of the family are usually located outside the BVI. The one occasional exception is bank accounts. When there are insolvency issues involving the BVI members of the family, the BVI courts are required to adjudicate those issues.
A DOMESTIC FAMILY COMPANIES
1. If insolvency proceedings must be commenced for the family of companies, does your law permit a joint proceeding, ie, a single court file, a single judge, a single list of creditors, single notice list, or must the case for each member of the family proceed separately with no practical acknowledgement of the related proceedings?
There are no provisions in the Act or the Rules that permit a single filing and single procedure for an insolvency proceeding involving more than one company in a family. In fact, the relevant provisions suggest the contrary. Section 159 of the Act states that the court may appoint liquidators ‘of a company’, and r 156(5) states that: ‘Where an applicant is making applications to appoint a liquidator for more than one company, a separate affidavit (in support of the application) shall be filed in respect of each application.’ These provisions suggest that separate applications must be made for each company.
In practice, individual applications are made in respect of each member of the family, and at the pre-trial or directions hearing the applicant applies for an order consolidating the applications. If the judge is satisfied that it is a proper case for consolidation he will order that the applications be dealt with as one case. This will result in a single court file consisting of several sub-files, a single judge dealing with all the applications together, and a single notice to all creditors and other persons having an interest in the insolvency of the companies within the family.
(a) What if the members of the family are organised under, or operate in, different locations within your country? Can a company from a distant location in your country commence its bankruptcy proceeding where its affiliate is located, if the affiliate has already commenced its bankruptcy proceeding?
The issue of separate proceedings in different locations within the BVI does not arise in practice because there is only one court in the BVI that deals with insolvency issues, and all applications must be filed and dealt with in that court.
(b) To the extent your country has different types of insolvency proceedings (such as Chapter 11 reorganisation and Chapter 7 liquidation in the US), do the members of the corporate family all have to proceed under the same type of proceeding?
The BVI has two types of involuntary insolvency proceedings, namely administration (which is similar to UK administration)1 and liquidation. There is no requirement in the Act or the Rules that suggests that all the members of a corporate family have to proceed under the same type of insolvency proceeding. The separateness of each entity is fully recognised and protected in the Act, notwithstanding that they are members of a corporate family.
2. Does your law permit, or prohibit, a single administrator/trustee /receiver to administer the assets and the liabilities of the entire corporate family?
BVI law neither prohibits nor permits a single administrator or liquidator administering the assets and liabilities of the entire corporate family. However, in practice the BVI courts have appointed the same liquidators or administrators that were appointed by foreign courts, most commonly the English High Court, to be liquidators of a BVI company where it is a part of the family of companies. In one case, Re RBG Global SA (BVIHCV No 2002/0152 (unreported)), the liquidators of an English company in a family of companies applied for the appointment of liquidators of a BVI company (also a member of the family). The family of companies was alleged to be involved in a massive international fraud. The BVI company objected to the proposed liquidators on the ground that they had a conflict of interest, because one of them was a director of one of the subsidiaries of the BVI company. The proposed liquidators invited the BVI court to follow the decision of Hoffman J in Re Maxwell Communication Corpn plc ([1992] BCLC 465) where the proposed administrators were familiar with the target company’s affairs from doing a previous investigation on behalf of the company’s bankers, but had an obvious conflict of interest. Hoffman J appointed them because he found that their prior knowledge would allow them to carry out the administration more cheaply and effectively, notwithstanding their conflict of interest.
The judge in the RBG case gave an oral decision in which he appointed the proposed liquidators, and one can only assume that he was attracted to the reasoning of Hoffman J (which makes good practical sense) that the proposed liquidators were well suited to be appointed because of their prior knowledge of the affairs of the corporate family and so could do the liquidation more cheaply and effectively.
(a) If so, is there a hearing for the court to determine whether the administration by a single party is appropriate? Are secured and unsecured creditors or other parties in interest allowed to object or be heard at such hearing?
The BVI court would not appoint a single administrator/liquidator of a family of companies without a proper hearing at which the target company and all interested parties were given a chance to be heard.
1 Part 111 of the Act dealing with Administration is not yet effective. It will become effective when the Governor publishes the required proclamation in the Official Gazette. It is not clear when this will happen.
(b) What about joint representation by other professionals, such as law firms or accounting or auditing firms?
In an appropriate case, a BVI court would allow joint representation by professionals such as law, accounting and auditing firms. The considerations would be similar or the same as when appointing joint administrators/liquidators – prior knowledge of the family or specialised skill in the type of insolvency leading to efficiency and savings of costs.
3. Does your law encourage or discourage overlapping boards or management teams for separate members of a corporate family?
The BVI law is silent on the issue of overlapping boards or management teams for separate members of the corporate family. However, there is no objection in principle to such boards or teams, but they are required to adhere to the very high standards required of fiduciary officers operating on overlapping boards or teams.
(a) If the directors of a parent company are not directors of the subsidiary, but they either directly or indirectly manage the affairs of the subsidiary anyway, do your country’s laws render such people de facto or ‘shadow’ directors of the subsidiary?
Section 6(1) of the Act defines a director as: ‘(i) a person occupying or acting in the position of director by whatever name called; (ii) a person in accordance with whose directions or instructions a director or the board of a body corporate may be required or is accustomed to act; and (iii) a person who exercises, or is entitled to exercise, or who controls, or is entitled to control, the exercise of powers which, apart from the memorandum or articles, would fall to be exercised by the board.’
The director of a parent company who manages the affairs of a subsidiary would fall under para (ii), and possibly (iii), and could be considered a de facto director of the subsidiary.
(b) Do the duties or responsibilities of officers or directors of a family of companies change when the companies become insolvent? For example does their duty shift from a responsibility to the shareholders to a responsibility to the creditors. What if only one of the companies is insolvent?
BVI law contemplates that when the companies in a family become insolvent the duties and responsibilities of the directors and officers change. Section 256(1) of the Act provides that: ‘On the application of the liquidators of a relevant company, (a company that has gone into insolvent liquidation), the court may make an order under subsection (2) against a person who is or has been a director of the company if it is satisfied that: (a) at any time before the commencement of the liquidation of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation; and (b) he was a director of the company at that time.’ Ss (2) gives the court the power to order the affected director to make a contribution to the company’s assets. Ss (3) provides a defence to the affected director if, upon becoming aware of the company’s insolvency, he took every reasonable step open to him to minimise loss to the company’s creditors.
The meaning of the section is clear. If a director who knows or ought to know that the company is facing insolvent liquidation, and the company does go into insolvent liquidation, he can be liable to contribute to the company’s assets. The section does not refer to officers of the company and this appears to be a deliberate omission.
If only one company in the group is insolvent and the director is not a director of that company, but he is a director of other solvent companies in the family, s 256 cannot be used to make him liable to contribute to the assets of the insolvent member of the group. This is always subject to s 8 of the Act, which could make such a person a de facto director of the insolvent company, in which case s 256 would again come into play to make him liable as a de facto director of the insolvent company.
The directors and officers also have to be mindful of the provisions of the Act dealing with the avoidance of the transactions by an insolvent company that are at an undervalue, unfair preferences, voidable floating charges, or extortionate credit transactions.
4. Are there rules and do they change regarding members of the corporate family transferring assets among one another (such as by way of loans, capitalisation, other transactions) when the members are insolvent?
Part VIII of the Act sets out provisions for setting aside certain transactions by an insolvent company (‘voidable transactions’). The Act sets out four types of voidable transactions, namely: unfair preferences; undervalue transactions; voidable floating charges; extortionate credit transactions.
A transaction is voidable if it is entered into by a company during the vulnerability period and the company was insolvent at the time, or the transaction causes the company to become insolvent.
The vulnerability period is defined in s 244 as two years prior to the outset of insolvency in the case of transactions with a ‘connected person’, and six months in the case of transactions with any other person.
A connected person includes members of the same corporate family (s 5).
The onset of insolvency is the date when an application for an administration order or an application for the appointment of liquidators is filed. The general effect of Part VIII is that the court, on the application of a liquidator or administrator, will set aside transactions by an insolvent company or transactions that have the effect of making the company insolvent. In the case of transactions between members of the same corporate family (connected persons) the transactions are liable to be set aside if made at any time during the two-year period before the onset of liquidation.
Unfair preferences (s 245)
An unfair preference is a transaction by a company with a creditor which is an insolvency transaction entered into within the vulnerability period, and has the effect of putting the creditor in a better position in the event that the company goes into insolvent liquidation. A transaction is not an unfair preference if it took place in the normal course of business. Where the transaction is with a creditor who is a connected person it is presumed that the transaction is an insolvency transaction and did not take place in the normal course of business, unless the contrary is proved.
Undervalue transactions (s 246)
An undervalue transaction is one that is entered into during the vulnerability period and provides the company with no consideration, or consideration that is significantly less than the market value. The transaction can be saved if it was entered into in good faith and for the purposes of the business of the company, and there were reasonable grounds for believing it would benefit the company.
Where the transaction is with a connected person it is deemed to be at an undervalue and not to be in good faith unless the contrary is proved.
Voidable floating charge (s 247)
A floating charge by a company can be set aside if made during the vulnerability period and is an insolvent transaction. If it is in favour of a member of the corporate family it is presumed to be an insolvency transaction unless the contrary is proved.
Extortionate credit transactions (s 248)
An extortionate credit transaction is one that requires the company to make grossly exorbitant payments for the provision of credit, or is a transaction that grossly contravenes ordinary principles of fair trading.
The vulnerability period for an extortionate credit transaction is five years. There are no special presumptions for transactions with corporate family members. However, the burden of proving unfairness would be more difficult to discharge in the case of transaction with a corporate family member.
It is clear that Part XIII of the Act places a heavy burden on companies within a family of companies to ensure that inter-company transactions are scrupulously fair if any or all of the companies in the group are insolvent. In fact, such a transaction during the vulnerability period will be valid only if the affected companies can prove that the transaction was fair in all respects and in the normal course of the companies’ business.
Transfers of assets between members of the corporate family, if made prior to the vulnerability period, can also be set aside at common law, but the burden of setting aside the transaction will be on the liquidators. For example, the sale of property by a company to a family member at an undervalue, say three years before the onset of insolvency, can be set aside on the application of a liquidator if it can be proved that the sale was at an undervalue and was not done in the normal course of business.
5. How does your law treat claims of one member of a corporate family against other members of the corporate family?
Claims by one member of the corporate family against other members of the family, assuming the claim to be against an insolvent member, are prima facie valid and enforceable. However, it is clear from our comments on Part VIII of the Act that if such a claim is a voidable transaction within the meaning of Part VIII, the claiming company will have a difficult time proving the claim.
(a) Are such claims invalid or unenforceable?
Assuming that a family member’s claim is not set aside under Part XIII, or at common law, the claim will be on an equal footing with those of third party creditors.
6. Does your law allow for the pooling of assets and liabilities of all members of the corporate family, so that a creditor of one member becomes, in essence, a creditor of all members (sometimes referred to as ‘substantive consolidation’)?
There are no specific provisions in BVI law allowing the pooling of assets and liabilities of all members of the corporate family so that a creditor of one member becomes a creditor of all members, and logically one would not expect this to be the case. It cuts across the doctrine of individual corporate personality. However, the leading case on pooling of assets and liabilities, Re BCCI SA (No 3), is an excellent illustration of how the courts will interpret the law to do what is best for the general body of creditors. In this case the court approved a pooling agreement whereby the assets and liabilities of BCCI SA (a Luxembourg company in liquidation in Luxembourg) were combined with the assets and liabilities of BCCI Overseas (a Cayman Islands company in liquidation in the Cayman Islands) and creditors of both companies had to claim from the common pool. The basis for the pooling agreement was that the affairs of BCCI SA and BCCI Overseas were so intertwined that a pooling of their assets, with a distribution enabling the like dividend to be paid to both companies’ creditors, was the only sensible way to proceed.
BCCI was a very special case with its unique facts, but at the end of the day, the court’s duty in an insolvent liquidation is to do what is best for the creditors.
(a) If so, is such pooling automatic or does it require a factual showing and court involvement?
A pooling arrangement is an extreme measure requiring creditors to prove their claims against companies with which they did not necessarily have a prior relationship. As such it must be approved by the court on good evidence that the arrangement will be in the best interest of the creditors.
(b) What proceedings (motion, request, trial, etc.) are required for the court to order the pooling of assets and liabilities?
The application would be made by the liquidators of the respective companies to a judge in chambers.
(c) Does your country’s law contemplate any partial pooling of assets and liabilities?
BVI laws do not contemplate a partial pooling of assets and liabilities.
7. How are secured creditors treated with respect to a family of companies? For instance, if a creditor has a security interest in the assets of one member of the family, and a guarantee from another member of the family, are both such claims valid in insolvency proceedings of the entire family?
There are several instances in the Act where the rights of secured creditors are specifically recognised and preserved. For example s 175(2) recognises and preserves the right of a secured creditor to take possession of and realise assets of the company over which he has a security interest, notwithstanding the appointment of a liquidator. It follows that a pooling arrangement would be subject to the rights of secured creditors.
Secured creditors of family companies that are insolvent will be subject to potential challenges under Part XIII if the securities were granted during the vulnerability period, or at common law if granted outside the vulnerability period. However, such transactions will be upheld by the liquidator, or the court if necessary, if they are satisfied that the security was created fairly and in the normal course of the company’s business. There is no rule that a security interest will be defeated simply because it was created between members of the same corporate family.
8. Do your laws or courts provide for post-insolvency commencement of new financing that allows continued operation of the business and provides adequate protection to the lender who made the loan? Explain.
The issue here is whether the laws of the BVI provide for new financing that allows the continued operation of the company’s business, and adequate protection to persons who make such loans, after the commencement of insolvency. The short answer is that the BVI does make such provision in its laws, but there is a significant difference between an insolvent company that is in administration and one that is in liquidation.
The administration of a BVI company commences on the date when the court makes an order appointing the administrator (s 76), and the commencement or onset of insolvency, for administration purposes, is defined in s 244 as the date when the application for an administration order is filed. One of the main reasons for appointing an administrator of an insolvent company is, where possible, to rehabilitate the company by allowing it to trade out of its financial difficulties (s 76). In doing so the administrator is required to take control of the assets of the company and manage its business and affairs. In carrying out his general duties the administrator has power ‘to borrow money, whether on the security of the assets of the company, or otherwise’ (schedule 1 to the Act). The administrator can exercise this power after the commencement of insolvency to obtain new financing to continue the operation of the company’s business. The Act does not deal specifically with the issue of protection of the lender but the prudent thing for a lender to do is to ask for court approval of the loan on terms that give him full protection. The court has a wide discretion to give the lender such protection.
In the case of a company that is in insolvent liquidation, the liquidator has power to carry on the company’s business, but only so far as may be necessary for its beneficial liquidation (Schedule 2 of the Act). The liquidator also has power to borrow money on the security of the company’s assets or otherwise. It is clear that a liquidator can borrow for any purpose that is reasonably necessary for the beneficial liquidation of the company. The BVI courts have approved loans by creditors to the liquidator for the purpose of investigating the affairs of the company and pursuing claims against third parties. Such loans are usually unsecured, but the court order approving the loan gives the lenders/creditors priority over the unsecured creditors of the company for the repayment of the loan.
Section 186 of the Act suggests that the liquidator can borrow on the security of the company’s assets without the court’s approval. However, in the case of an insolvent liquidator, it is prudent to get court approval to eliminate any questions about the validity of the security or the priority of the loan in the liquidation.
The loan should not be for the continued operation of the business of the company. A company in insolvent liquidation is not allowed to trade out of its difficulties and a loan for this purpose would be ultra vires the liquidator’s powers and liable to be set aside. To be valid the loan must be for the beneficial liquidation of the company.
9. Are directors and officers subject to civil or criminal sanctions if:
(c) Same as (b) above but the directors believe that if some event occurs (eg chance to obtain new contract in prospect, new equity infusion, or new financing) it will be able to save the company and pay its bills.
Fraud and misrepresentation by directors and officers
The directors and officers of a company who engage in fraud or misrepresentation in relation to the finances of the company can be liable to various civil and criminal sanctions.
Directors and officers have a common law duty to act bona fide for the benefit of the company as a whole. This duty is codified in Section 54 of the IBC Act as a duty: ‘…to act honestly and in good faith with a view to the best interests of the company and exercise the care and skill that a reasonably prudent person would exercise in comparable circumstances.’
Directors and officers who are guilty of fraud or misrepresentation in relation to the finances of a company would be in breach of this common law and statutory duty, and are liable in damages to persons who suffer loss as a result of their fraud or misrepresentation.
The Insolvency Act also provides the following civil and criminal sanctions against directors and officers for fraud or misrepresentation relating to the company’s finances: 
Where the liquidator of a company is satisfied that a director or officer of the company has misapplied or retained any money or other assets of the company, and is guilty of misfeasance or breach of his fiduciary or other duties to the company in doing so, the liquidator can apply to the court for an order that the delinquent director or officer repay, restore or account for the money or assets, and pay compensation to the company for misfeasance or breach of duty and interest at such rate as the court sees fit. The director or officer must be given the chance to give evidence and call his own witnesses, and to be represented by counsel. 
If the liquidator of an insolvent company is satisfied that at any time before the commencement of the liquidation the business of the company was carried on with the intent to defraud creditors of the company, or for any fraudulent purpose, he may apply to the court for an order that any person who was knowingly a party to the carrying of the business in such manner is liable to contribute to the company’s assets. The section has never been interpreted by the BVI courts but it is the writer’s view that it would include fraud or misrepresentation in relation to a company’s finances by the directors and officers in appropriate cases. The relevant director or officer could therefore be asked to make a personal contribution to the company’s assets. 
- The Official Receiver can apply to the court for a disqualification order against a person who is or was a director or officer of a company that is or becomes insolvent and the director or officer has committed fraud, misfeasance or breach of duty in relation to the company. This includes fraud or misrepresentation in relation to the finances of the company. A disqualification order prohibits the affected person from engaging in any ‘prohibited activities’ which include acting as a director, officer, liquidator or receiver of a company, or being concerned in any way with the promotion, formation or management of a company. This itself is a severe sanction. If the disqualified person breaches the disqualification order by engaging in a prohibited activity he commits an offence and can be sentenced to fine of up to $7,500 and imprisonment for up to two years (s 267).
A disqualified person can also incur personal liability for the company’s debts if he is involved in the management of the company in breach of a disqualification order. 
-Section 256 of the Act provides that where the directors of a company continue to operate the company knowing that it does not have a reasonable prospect of avoiding going into insolvent liquidation, and the company does go into liquidation, the liquidator can apply to the court for an order that the directors make a contribution to the company’s assets. The section applies to directors only and does not include other officers of the company. As with s 255 (fraudulent trading) a successful application by the liquidator will result in the directors being personally liable to contribute to the company’s assets.
The section provides a defence to a director and the court will not make an order against a director who, after he first knew, or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation, he took every step reasonably open to him to minimise the loss to the company’s creditors. Therefore, if the directors reasonably believe that there is a transaction on the horizon that will save the company and allow it to avoid going into liquidation, they will not be in breach of the section by allowing the company to continue trading for a reasonable time, and will not be personally liable to contribute to the company’s assets.
The facts that a director should know, the conclusions that he ought to reach, and the steps he ought to take are judged on an objective standard of a what may be reasonably expected of a person carrying out the same functions as are carried out by the director in relation to the company. However, a subjective standard is applied if the director has more than a reasonable knowledge, skill and experience and he will then be judged by his own high standards. The application of the objective and subjective standards places an very high burden on all directors, regardless of their level of knowledge, experience and competence.
B. INTERNATIONAL FAMILY OF COMPANIES
1. If one or more members of the corporate family is incorporated under or governed by the laws of another country, does that change your answers to any of the questions set forth above?
It follows from the nature of insolvency proceedings in the BVI that there is a high probability that some members of the family will be incorporated outside the BVI. This would not have a significant effect on any of the statements above regarding domestic family companies.
2. If insolvency/restructuring proceedings are instituted for corporate family members in different countries:
If a BVI company is being liquidated locally, the BVI court will assume jurisdiction over its worldwide assets. The liquidator will be expected to take possession of all the company’s property. However, this power is subject to the laws of the place or places where the assets are located.
Where the BVI court is winding up a foreign company in a subsidiary liquidation as part of a family or otherwise, it will only exercise jurisdiction over assets in the BVI. Subject to BVI laws concerning issues such as the rights of secured creditors and rights of set-off, it will make these assets available to the liquidator in the main liquidation.
Where a foreign company has assets in the BVI, and is being liquidated in a foreign country, the proper procedure is for the liquidator appointed in the foreign insolvency proceeding to apply to the BVI court for recognition of his appointment. Recognition will usually be granted where the foreign insolvency proceeding is in a country to which the foreign company has a substantial connection by virtue of incorporation, conduct of business, or the ownership of assets in that jurisdiction. Once recognition is granted the BVI court should enforce the order of the foreign court.
The BVI has adopted the UNCITRAL Model Law on Cross-Border Insolvency in Part XVIII of the Act. However, Part XVIII is not yet effective, and will not become effective until the Governor makes the required proclamation. It is not clear when this will happen.
