What a creditor needs to know about liquidating GUIDE an insolvent BVI company Last reviewed: October 2020 Contents Introduction 3 When is a company insolvent? 3 What is a statutory demand? 3 Written request for payment 3 Is it essential to serve a statutory demand? 3 What must a statutory demand say? 3 Setting aside a statutory demand 4 How may a company be put into liquidation? 4 Qualifying resolution 4 Appointment 4 Liquidator's powers 4 Court order 5 Who may apply? 5 Application 5 Debt should be undisputed 5 When does a company's liquidation start? 5 What are the consequences of a company being put into liquidation? 5 Assets do not vest in liquidator 5 Automatic consequences 5 Restriction on execution and attachment 6 Public documents 6 Other consequences 6 Effect on contracts 6 How do creditors claim in a company's liquidation? 7 Making a claim 7 Currency 7 Contingent debts 7 Interest 7 Admitting or rejecting claims 7 What is a creditors' committee? 7 Establishing the committee 7 2021934/79051506/1 BVI | CAYMAN ISLANDS | GUERNSEY | HONG KONG | JERSEY | LONDON mourant.com Functions 7 Powers 8 What is the order of distribution of the company's assets? 8 Pari passu principle 8 Excluded assets 8 Order of application 8 How are secured creditors affected by a company's liquidation? 8 General position 8 Liquidator challenge 8 Claiming in the liquidation 8 Who are preferential creditors? 9 Preferential creditors 9 Priority 9 What are the claims of current and past shareholders? 9 Do shareholders have to contribute towards the company's debts? 9 Current shareholders 9 Past shareholders 10 Who may be appointed as liquidator? 10 Status 10 Offence 10 Eligibility 10 Overseas insolvency practitioners 10 What are the liquidator's duties? 11 Core duties 11 Duty to report wrongdoing 11 Common law duties 11 Skill and care 11 Fiduciary duties 11 To whom are duties owed? 11 What is the liquidator's role? 11 What are the liquidator's powers? 12 General powers 12 Investigative powers 12 What is a provisional liquidator? 13 Who may apply for appointment? 13 When will a provisional liquidator be appointed? 13 Powers 13 When does the appointment end? 13 May a liquidator's actions be challenged? 14 Who may apply to remove a liquidator? 14 Does set-off apply on insolvency? 14 Does closeout netting apply on insolvency? 14 A brief anatomy of a creditor initiated liquidation process 15 Contacts 17 2021934/79051506/1 BVI | CAYMAN ISLANDS | GUERNSEY | HONG KONG | JERSEY | LONDON 2 mourant.com Introduction One of the main reasons the BVI remains a popular place to establish an asset holding company is that its insolvency laws are creditor friendly and modelled on the English Insolvency Act 1986. Consequently, lenders around the world are comfortable lending money to BVI companies. This guide examines the main things a creditor needs to know about liquidating an insolvent BVI company under the Insolvency Act 2003 (the Act) and the Insolvency Rules 2005 (the Rules). A brief anatomy of a creditor initiated liquidation process is included at the end of this guide. When is a company insolvent? Under the Act, a company is regarded as being insolvent if: • cash flow insolvency: it is unable to pay its debts as they fall due; • balance sheet insolvency: the value of its liabilities exceeds its assets; or • technical insolvency: it is taken to be insolvent (irrespective of its actual solvency) because: ◦ it fails to comply with a valid statutory demand; or ◦ execution of a judgment or other order of a BVI court against it is returned wholly or partly unsatisfied. What is a statutory demand? Written request for payment A statutory demand is a formal written request for the payment of a debt given by a creditor to a debtor. Is it essential to serve a statutory demand? It is not essential for a creditor to serve a statutory demand before applying to appoint a liquidator because a company may be cash flow or balance sheet insolvent. In most cases, it is advisable to serve a statutory demand first because the company will be presumed to be insolvent if it does not satisfy or compound the debt within 21 days of the date of service. If a creditor has an unsatisfied judgment against the company, it may prefer to apply to appoint a liquidator on the grounds of insolvency using the unsatisfied judgment as evidence of the company's inability to pay its debts as they fall due. However, to avoid a potential argument being raised by the judgment debtor that, notwithstanding its failure to satisfy any order or judgment for payment of a liquidated sum, it remains able to pay its debts as they fall due, it is advisable that a statutory demand for the judgment sum be issued as a preliminary step. What must a statutory demand say? A statutory demand must comply, and be served in accordance with, the Rules. It must: • be for a debt which is not less than the statutory minimum amount (currently US$2,000) and which is due and payable at the time of the demand; • be in writing and state the nature of the debt and its amount; • be dated and signed by, or on behalf of, the creditor; • require the debtor to pay the debt or secure or compound it to the reasonable satisfaction of the creditor within 21 days of the date of service; • state that, if the debtor does not comply with it, the creditor may apply to the High Court for a liquidator to be appointed; and • state that the debtor has the right to apply to have it set aside. Where the creditor issuing a statutory demand holds security for the debt, the statutory demand must: • state the full amount of the debt; • state the nature of the security interest; 2021934/79051506/1 BVI | CAYMAN ISLANDS | GUERNSEY | HONG KONG | JERSEY | LONDON 3 mourant.com • state the value which the creditor places on the security interest on the date of the statutory demand; and • claim the full amount of the debt less the amount stated to be the value of the security interest (the balance must be at least equal to the statutory minimum amount of US$2,000). Setting aside a statutory demand An application to set aside a statutory demand must be made within 14 days of the date on which it was served. Where an application is made, the 21 day compliance period ceases to run from the date on which the application is filed. The High Court must set aside a statutory demand if it is satisfied that: • there is a substantial dispute as to whether: ◦ the debt is owing or due; or ◦ a part of the debt (which would reduce the undisputed amount of the debt to less than the statutory minimum amount of US$2,000) is owing or due; • the debtor has a reasonable prospect of establishing set-off, counterclaim or cross claim in an amount that would reduce the debt to less than US$2,000; or • the creditor holds security for the debt and the unsecured portion of the debt claimed is less than US$2,000. The court also has discretion to set aside a statutory demand if it is satisfied that there would be substantial injustice because there is a defect in it or for some other reason. How may a company be put into liquidation? A company may be put into liquidation by a liquidator being appointed by a resolution of the shareholders (i.e. voluntary liquidation) or an order of the High Court (i.e. compulsory liquidation). Qualifying resolution Where a company is insolvent, its shareholders may pass a qualifying resolution to appoint an eligible insolvency practitioner (See Eligibility below) as liquidator unless: • a liquidator has already been appointed by the High Court; or • an application to appoint a liquidator has been made but not yet heard. A qualifying resolution is a resolution passed at a properly held shareholders' meeting by a majority of 75 per cent (or any higher majority specified in the company's memorandum or articles) of the votes cast by the shareholders present and voting. If the company is a regulated person, the BVI Financial Services Commission (the Commission) must be given at least five working days' prior notice (or any shorter period it may agree) of the qualifying resolution. Appointment The proposed liquidator must consent in writing to being appointed before the qualifying resolution is passed, otherwise the resolution is void. The company must give the proposed liquidator notice of appointment as soon as possible once the qualifying resolution has been passed. Liquidator's powers Where a liquidator is appointed by the shareholders under the Act: • the liquidator's powers are limited to: ◦ taking custody and control of the company's assets; ◦ disposing of perishable goods or other assets that will diminish in value if they are not immediately sold; ◦ doing anything necessary to protect the company's assets; and ◦ exercising any other powers of a liquidator the High Court may confer; and • the liquidator may be replaced by the creditors at the first meeting of creditors. 2021934/79051506/1 BVI | CAYMAN ISLANDS | GUERNSEY | HONG KONG | JERSEY | LONDON 4 mourant.com Court order Who may apply? Where a company is insolvent, an application to appoint a liquidator may be made by (among others): • the company; • a shareholder if the High Court has given its prior permission (which it will only give if it is satisfied that, on the face of things, there is a case that the company is insolvent); or • a creditor who can show either that the company is insolvent (on either the cash flow or balance sheet basis) or that it is just and equitable that a liquidator be appointed.