British Virgin Islands: Something To Prove? Creditor Standing And Public Policy Considerations: Hints Of The Court's Approach To Parallel Insolvency Proceedings In The BVI

Introduction

In a recent case, Nokian Shina LLC v Andrei Valerevich Smyshliaev & Ors,¹ the BVI Commercial Court (the 'Court') considered whether public policy in the Virgin Islands (the 'BVI') would bar recognition of a foreign judgment in favour of a single creditor in circumstances where there are collective insolvency proceedings on foot elsewhere in which that creditor has proved. The Judge (Wallbank J) took the view (albeit that this aspect of his judgment is obiter) that public policy would not require that the Court refuse enforcement in such circumstances. The Judge's expressed view is of interest because it may provide some indication as to the way in which the Court may approach a different, but similar, question, namely, whether a creditor which has proved in a liquidation of a foreign company in the place of its incorporation may nevertheless petition for the winding up of the same company in the BVI. This question is important in the BVI context because of the limited jurisdiction which the Court has to assist representatives appointed in foreign insolvency proceedings. Under the current law, assistance may be provided under Part XIX of the BVI Insolvency Act (the 'Act') only to foreign representatives appointed or authorised in foreign proceedings in 9 overseas countries and territories.² Representatives from elsewhere may be recognised at common law but the Court does not have jurisdiction to provide assistance in such circumstances.³ Recognition, without assistance is, of course, of limited use. One work around would be if the foreign company could be placed into liquidation by the Court, so that its assets could be administered in parallel to the liquidation in that company's home jurisdiction in accordance with the principles of BVI law. But does that work, and if so, under what circumstances? And what approach would the Court take to such a secondary application?

Nokian: the public policy argument

In Nokian, it was argued on behalf of the Second Defendant that, even if a money judgment which had created a liability was otherwise enforceable in the BVI, public policy would dictate that the Court should not allow its enforcement where the judgment creditor had proved in the liquidation of the judgment debtor in respect of the same debt in the debtor's country of incorporation. There was no dispute, in Nokian, that the Russian bankruptcy process in which the creditor had proved was a collective process. That being so, it was said, it would be contrary to public policy to allow a single creditor to enforce in the BVI as contrary to the principle underlying the collective nature of the process which mandates that the rights of individual creditors are extinguished in favour of the general body of creditors so that the assets of the debtor may be distributed amongst its creditors on a pari passu basis. The Court rejected this submission. The Judge's view was that public policy would not require that the Court refuse enforcement in such circumstances. On this public policy issue, the Judge said this:

Although the question was not determinative of the Court's decision in Nokian, and, as he makes clear, on this point Wallbank J was speaking obiter, the Judge's words go much further than the question of enforceability in the BVI of a foreign judgment and speaks to wider public policy considerations which may inform the Court's approach in the broader context, in particular, where the question of enforceability arises in the context of a creditor's winding up petition where there is already overseas insolvency proceedings on foot.

Legal framework

The Court has jurisdiction to wind up a foreign company, that is, a company incorporated, registered or formed outside the BVI, on an application under section 163 of the Act. Such an application may be made by the company itself, a creditor or a member, amongst others.

The Court may wind up the foreign company if it satisfied: (1) that the company has a connection with the BVI (as to which, see below); and (2) that (a) the company is insolvent; (b) the Court is of the opinion that it is just and equitable that the company be wound up; (c) the Court is of the opinion that it is in the public interest that the company be wound up; (d) the company has been dissolved or otherwise ceased to exist under the laws of its place of registration; (e) the company has ceased to carry on business; or (f) the company is carrying on business only for the purpose of winding up its affairs.

For the purposes of section 163 of the Act, a foreign company has a connection with the BVI only if: (a) it has or appears to have assets in the BVI; (b) it is carrying on or has carried on business in the BVI; or (c) there is a reasonable prospect that the appointment of a liquidator of the company will benefit the creditors of the company.

If the effect of the Order of the foreign court is to allow the office holder to take steps in the company's name, then the most obvious course of action is for the company itself to make the necessary application to the Court. Provided that the company can produce expert evidence sufficient to persuade the Court that the effect of the Order of the foreign court is to confer standing on it to make the application in the BVI and there is evidence of fact to demonstrate the necessary connection with the BVI and the grounds for a winding up identified above, then such a course would avoid most of the difficulties attendant on an application by a creditor. However, where the company is not itself in a position to petition, then it may be necessary to look to a creditor to take the necessary steps in the BVI.

A creditor seeking a winding up in the BVI has to satisfy the Court of a number of things before the Court's jurisdiction will be engaged. As a threshold point, he must establish his locus standi to petition. In order to have locus standi to make an application under the Act for the winding up of a company, whether foreign or domestic, a creditor must be able to bring itself within the definition of that term supplied by section 9(1) of the Act. That section provides (so far as material) that: 'A person is a creditor of another person (the debtor) if he or she has a claim against the debtor, whether by assignment or otherwise, that is, or would be, an admissible claim in ... the liquidation of the debtor, in the case of a debtor that is a company or a foreign company'.

'Admissible Claims' are defined in section 11 of the Act and include (again, so far as material):

1. liabilities of the company at the time of the commencement of the liquidation (the 'relevant time');
2. liabilities of the company arising after the relevant time by virtue of any obligation incurred before the relevant time; and
3. any interest that may be claimed in accordance with the Act or the Rules.

Section 12 of the Act excludes from the definition of admissible claims, inter alia, '... a liability that, under any enactment or rule of law, is of a type that is not claimable, whether on the grounds of public policy or otherwise'.

The definition of liabilities is to be found in section 10 of the Act and includes '... a liability to pay money or money's worth including a liability under an enactment, a liability in contract, tort or bailment, a liability for a breach of trust and a liability arising out of an obligation to make restitution, and "liability" includes a debt'. A liability may be present or future, certain or contingent, fixed or liquidated, sounding only in damages or capable of being ascertained by fixed rules or as a matter of opinion. However, an illegal or unenforceable liability is deemed not to be a liability for the purposes of the Act. This, therefore, is where the question of the enforceability or otherwise of a liability and the public policy issues comes into play.

The foreign element

So, in summary, where a creditor proposes to make a winding up application to the Court, in order to satisfy the Court that he has locus standi to petition, the creditor must be able to show that the claim on which he relies to found his standing is an admissible claim as a matter of BVI law. Where the subject of the winding up is a foreign company, and that foreign company is the subject of an insolvency process elsewhere, and assuming always that it can be satisfied that the nature of the company's liability is such as to bring it within the very broad definition of a liability provided by section 10 of the Act, this question will involve the Court in a bipartite analysis. First, the Court must be satisfied that the foreign company's liability to the creditor survives notwithstanding the foreign insolvency process and that the effect of that process is not to determine the liability and, second, it must be satisfied that, notwithstanding the foreign liquidation, the creditor remains entitled to take enforcement action or to petition for the winding up of the company elsewhere. To this end, the creditor must be prepared to address the Court as to whether these questions raise procedural or substantive issues. The significance of this is that matters of procedure are governed by the law of the country to which the court hearing the winding up petition belongs⁴ (lex fori), so, in this case, BVI law, whilst matters of substance are governed by the law to which the court is directed by its choice of law rule (lex causae).⁵ In deciding whether a foreign rule is procedural, the court will refer to the applicable foreign law in order to determine whether the rule is of such a nature as to be procedural. This will involve expert evidence of foreign law directed to the question. As a preliminary, the Court may also need to determine which foreign laws are to be applied in the particular case. If the Court decides that the effect of the foreign law is substantive or involves substantive issues, then further expert evidence of foreign law will have to be adduced to enable the Court to decide on whether, as a matter of that foreign law, the company's liability to its creditor survives the foreign liquidation and whether the creditor is entitled to pursue a winding up outside the foreign liquidation.

An English template

A template for the process may usefully be found in PJSC VTB Bank v Laptev [2020] EWHC 321 (Ch), although it is to be emphasised that this was a decision of the High Court of England and Wales (the 'English Court') under the English Insolvency Act 1986 (the 'English Act') in respect of an individual the subject of a bankruptcy petition. The provisions of English bankruptcy law are materially different from the BVI law of company liquidations (and, indeed, from the BVI law of bankruptcy). The case is therefore useful only as to the process of analysis and is not a precedent as to the law or the outcome.

Mr Laptev had been made bankrupt in Russia and the Applicant Bank, PJSC VTB Bank (the 'Bank'), had submitted a proof in that bankruptcy. Having discovered the existence of assets in England, the Bank then filed a bankruptcy petition in England, based on the same debt, and it was that petition which was the subject of the English Court's decision. Mr Laptev contested the petition on several bases. In particular, he argued that having 'proved' in the Russian bankruptcy proceeding, the Bank was not a creditor to whom a debt was 'payable' under section 267 of the English Act. Section 267 of the English Act provides (so far as material) that a creditor's petition may be presented to the court in respect of a debt or debts only if, at the time the petition is presented the debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor either immediately or at some certain, future time, and is unsecured. In determining this question, whether the debt was 'payable', the English Court had, first, to decide whether the issue was one of English or of Russian law, and, having decided it was a matter of Russian law, whether under Russian law, the making of a bankruptcy order in Russia discharges or releases a debt to which the debtor was subject prior to the making of the order. The English Court held that this question was to be answered in the negative: the experts who gave evidence of Russian law to the court agreed that the making of a bankruptcy order by the Russian court does not discharge or release the debts due to a creditor

Having decided that first issue, the English Court then went on to consider whether as a matter of Russian law, a creditor who has proved in Russian bankruptcy proceedings has the right to take steps separate from its participation in those proceedings such as by taking other enforcement action in Russia or elsewhere, or by petitioning for bankruptcy in a foreign jurisdiction. In the absence of any reported decision of the Russian court deciding the point, the two experts, whilst agreeing that the Russian court would take a teleological approach and apply public policy considerations, disagreed as to the manner in which the Russian court would apply those principles. Mr Laptev's expert gave evidence to the effect that Russian law prohibited creditors from taking any actions outside a Russian bankruptcy and that the submission of a proof in the bankruptcy was their exclusive remedy. It followed that the debt on which the Bank relied was not 'payable' and its petition must fail. The Bank's evidence was that Russian law did not prohibit a creditor from taking steps against the bankrupt abroad where it was acting on behalf of all creditors and where it did not violate the priority order in the bankruptcy. The English Judge disagreed with the Bank's expert and preferred the evidence of Mr Laptev's expert. She concluded that comity required that she should find that the debt on which the Bank relied was not currently payable in a manner which entitled the Bank to petition for Mr Laptev's bankruptcy in England under the English Act and she so held.

The BVI analysis

The BVI Act contains in relation to the bankruptcy of individuals, in section 296, a provision to similar effect as section 267 of the English Act. Section 296 requires (so far as material) that a creditors application for a bankruptcy order against an individual be made in respect of a liability or liabilities which, at the time of the application, is for a liquidated sum payable to the applicant creditor immediately. There is a similar requirement in relation to a statutory demand, whether the demand is to be made of an individual or a company: section 155(2)(a) of the Act requires that the debt the subject of such a demand be due and payable at the time of the demand. The Laptev decision is not, of course, binding on the Court and extends no further than the particular facts of that case, including the evidence as to Russian law as it existed at the time the case was heard.⁶ In any event, and importantly, there is no provision comparable to section 296 of the Act which applies where the creditor applies to appoint a liquidator to a company or a foreign company where such creditor does not rely on a statutory demand: the issue arises only where the creditor seeks to rely on a statutory demand. No such question arises where the creditor petitions on the basis that it is just and equitable that the company be wound up, that the company has been dissolved under the laws of its place of registration, has ceased to carry on business or that it is carrying on its business only for the purpose of winding up its affairs. None of these grounds for an application to appoint liquidators is premised on the existence of a debt payable at the time. A creditor can also, of course, petition on the grounds of insolvency if they can establish the company's insolvency without recourse to a statutory demand.

However, where the applicant is a creditor, he does need to be able to establish that he is a 'creditor' within the definition of that term as supplied by section 9 of the Act. As explained above, this requires that the creditor demonstrate the existence of an admissible claim and that the company's liability to him is not an unenforceable liability. For this purpose, where the company is subject to a foreign insolvency process, the creditor must undertake a similar process to that undertaken in Laptev and satisfy the Court that the company's liability to him is enforceable by establishing both (i) that the foreign company's liability to him survives notwithstanding the foreign insolvency process and that the effect of that process is not to determine the liability; and (ii) that, notwithstanding the foreign liquidation, the creditor remains entitled to take enforcement action or to petition for the winding up of the company elsewhere.

The Judge's words in Nokian are not, of course, a substitute for this process but what can be taken from them is that the fact that a company may be in a foreign insolvency process will not, without more, mean that the Court will necessarily decline to recognise the standing of a creditor of that company on public policy grounds. Nor will it refuse, as a matter of principle, to appoint liquidators to a foreign company simply because there is an extant liquidation in the company's home jurisdiction. In each case, the Court will need to undertake a careful review of the nature and effect of the foreign insolvency process and the entitlement of the creditor to proceed notwithstanding that process. However, where questions of public policy are engaged, what Wallbank J's words in Nokian suggest is that the Court's principal consideration is likely to be whether in the particular circumstances of the case it is likely to assist with the enforcement of the debts of the foreign debtor for the benefit of its creditors that the Court exercise its discretion to wind up the company.

Footnotes

1. Nokian Shina LLC v Andrei Valerevich Smyshliaev & Ors BVIHCM 2020/0113.

2. Australia, Canada, Finland, Hong Kong, Japan, Jersey, New Zealand, the United Kingdom and the USA.

3. The common law jurisdiction having been abrogated by the enactment of Part XVIII of the Act which, however, has not been brought into force – Net International Property Limited v ADV. Eitan Erez BVIHCMAP2020/0010.

4. Dicey, Morris & Collins on the Conflict of Laws, 16th Ed. Rule 3, 4R-001.

5. Ibid. 4-003.

6. Early November 2019.

This article first appeared in Volume 20, Issue 2 of International Corporate Rescue and is reprinted with the permission of Chase Cambria Publishing - www.chasecambria.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.