British Virgin Islands: BVI Recognition And Assistance For Foreign Insolvency Office Holders

On 10 November 2014 the Privy Council handed down judgment in Singularis Holdings Limited v PricewaterhouseCoopers¹, which was heard alongside PricewaterhouseCoopers v Saad Investments Company Limited². Both appeals were from decisions of the Court of Appeal of Bermuda. The Singularis decision may affect the ability of foreign office holders to gain assistance from the BVI Courts, in particular with regard to obtaining orders compelling the production of documents and information.

Singularis

Singularis was heard alongside Saadbecause both cases concerned companies that were being wound up in the Cayman Islands. Their liquidators were seeking orders against PwC in Bermuda for the provision of information and documentation relating to the Cayman companies that the auditors had in their possession, especially their working papers. The Singularis application came about after the Bermudan judge at first instance found that the liquidators' appointment under Cayman law should confer recognition in Bermuda under a common law power that enabled him to confer on the liquidators the same powers as they would have had if they had been appointed in Bermuda. This was overturned by the Court of Appeal because the Bermudan Court's power to order the production of documents by the auditors did not have any equivalent in Cayman, and granting the liquidators powers that went beyond what the Cayman Court could grant was not permissible as it would amount to "unjustifiable forum shopping" by the liquidators. The liquidators appealed to the Privy Council.

The Privy Council Board were unanimous in finding that the Bermuda Court should not have granted a form of relief to the liquidators that was not available in Cayman, and accordingly the Privy Council dismissed the appeal. However in their reasoning, the Board discussed at length whether the Bermuda Court had a common law power to assist a foreign liquidation by ordering the production of information. By a majority of three to two, the Board held that such a common law power did exist.

The Board all agreed that the "principle of modified universalism is part of the common law". Lord Sumption (with whom Lord Clarke agreed) summarised the principle as being "founded on the public interest in the ability of foreign courts exercising insolvency jurisdiction in the place of the company's incorporation to conduct an orderly winding up of its affairs on a world-wide basis...the basis of that public interest is not only comity, but a recognition that in a world of global businesses, it is in the interest of every country that companies with transnational assets and operations should be capable of being wound up in an orderly fashion...".

The majority of the Board held that there is a common law power to assist foreign insolvency practitioners by ordering the production of information (in oral or documentary form) by an entity within the personal jurisdiction of the Bermuda Court. As Lord Sumption put it, the "acknowledged right [of foreign office holders] to take possession of the company's world-wide assets is of little use without the ability to identify and locate them, if necessary with the assistance of the court". The Board did, however, set out limitations for the exercise of that power, namely:

1. It is only available to assist the officers of a foreign court of insolvency jurisdiction or equivalent public officers – it would therefore not be applicable to a private arrangement such as a voluntary winding up;
2. It is a power of assistance that exists to enable courts to overcome the territorial limits of their own powers when a company's affairs are being wound up world-wide. An order for production of information should not be made where it would not be available in the foreign court;
3. It is only available when necessary for the insolvency practitioner to perform their functions;
4. The order must be consistent with the substantive law and public policy of the assisting court. In particular, the common law power is not to be used for obtaining material for use in actual or anticipated litigation (which has its own rules and forensic procedures); and
5. It is only exercisable on condition of the applicant being prepared to pay the third party's reasonable costs of compliance.

Assistance in the BVI

There are a number of routes which a foreign office holder might wish to explore in order to obtain powers in the BVI: (i) procuring the liquidation of the foreign company by the BVI Court; (ii) where available, seeking an order under Part XIX of the Insolvency Act 2003 ("the Act"); and potentially, in the light of Singularis, (iii) obtaining recognition and the limited assistance available at common law. In theory, there would also be potential assistance under Part XVIII of the Act (which contains more detailed provisions on cross-border insolvency) were that Part ever to be brought into force, but that appears unlikely in the foreseeable future.

Liquidation of foreign companies

In some circumstances it may be possible to apply for the winding up of the foreign company in the BVI under section 163 of the Act. Although the foreign office holders themselves would not have standing to bring such an application, not being persons mentioned in section 162(2) of the Act, they might be able to persuade a creditor to bring an application in the BVI with a view to a liquidator being appointed who would then have the full powers available to court-appointed liquidators (as modified by Schedule 3 in the case of foreign companies). The most likely ground for winding up of a foreign company would be that it had assets in the BVI, in the form of shares in BVI companies, which is one of the recognised forms of "connection" with the BVI³, such a connection being a pre-requisite for any appointment of a liquidator. The position in the BVI can be contrasted with that in Bermuda, where the insolvency legislation provides for winding up of foreign companies only in very limited circumstances⁴.

Statutory provisions for the assistance of foreign insolvency proceedings

Part XIX was considered by the BVI Commercial Court in the case of Re C (A bankrupt) (BVIHC(Com) 0080 of 2013). In that case trustees in bankruptcy of a Hong Kong bankrupt applied to the BVI Court for: (a) recognition at common law and assistance in the form of a grant of powers that they would have had if they had been appointed under the Act; alternatively (b) assistance under section 467, Part XIX of the Act.

The alternative case (under section 467, Part XIX) was successful. Part XIX only applies to representatives from designated relevant countries, but Hong Kong was such a country and accordingly the foreign representatives were entitled to apply for relief under Part XIX.

Assistance under Part XIX can include restraining the commencement or continuation of proceedings in the BVI, preventing enforcement of rights over property, ordering the delivery up of property or the appointment of a receiver over property and ordering the examination of persons by the foreign representative. However, when considering an application by a foreign representative the court is required to have regard to certain factors including protection of persons in the BVI who have claims against the debtor from prejudice and inconvenience in the processing of claims in the foreign proceeding, and the need for distributions in the foreign proceeding to be substantially in accordance with the order of distributions in a BVI insolvency.

The relief that can be granted under Part XIX is, however, limited to the powers mentioned in that Part. The court cannot apply provisions elsewhere in the Act "by analogy" if they do not on their terms apply to foreign representatives, following the decision on the primary case in Re C.

The primary case in Re C was advanced in reliance upon Cambridge Gas Transportation Corp v Official Committee of Unsecured Creditors of Navigator Holdings plc [2007] 1 AC 508, Re Phoenix Kapitaldienst: Schmitt v Deichman [2013] Ch 61 and a first instance Cayman decision in Picard v Primeo Fund (unreported, 14 January 2013). Those decisions supported the view that legislative provisions that were not in fact applicable could nevertheless be applied by a court by analogy. In the BVI Court, Bannister J rejected the argument that powers conferred by the Act on liquidators of BVI companies could be granted to foreign representatives by analogy. He considered that Re Phoenix was wrongly decided and distinguished Primeo as turning upon particular Cayman legislative provisions. Bannister J also declined to treat Cambridge Gas as going so far and in any event preferred to follow Lord Collins' approach in Rubin v Eurofinance [2013] 1 AC 236.

The liquidators in Singularis also relied on Cambridge Gas and Re Phoenix. The Board held that both were wrongly decided on this point, as was the decision in Primeo. Lord Collins held that "to apply insolvency legislation by analogy "as if" it applied, even though it does not actually apply, would go so far beyond the traditional judicial development of the common law as to be a plain usurpation of the legislative function." Lord Sumption also stated that the court cannot simply apply statutory powers by mere analogy in cases outside their scope. Bannister J was therefore clearly right, in Re C, to decline to confer statutory powers by analogy.

Common law powers

In Re C Bannister J also held that there was a power at common law to recognise the Hong Kong representatives and to grant assistance of the type discussed by Lord Collins in Rubin. That common law power had been preserved by section 470 of the Act. However, he held that the common law powers were only available to foreign representatives as defined in the Act, i.e. those from designated relevant countries.

Bannister J's reason was that the existence of Parts XVIII and XIX impliedly excluded the continued operation of any common law powers of assistance in favour of representatives who were not from relevant countries because it would be inconsistent with the statutory scheme for powers to be available that were not subject to the limitations contained in those Parts. In his view Part XIX restricted comity to foreign representatives as defined in Part XIX. He relied on paragraph 76 of Lord Neuberger's judgment in Re HIH Insurance [2008] UKHL 21, in which Lord Neuberger declined to hold that there was any inherent jurisdiction in the English courts to remit assets to liquidators in a foreign jurisdiction because it would have been inconsistent with section 426 of the English Insolvency Act. However, in that passage Lord Neuberger considered the possibility that section 426 had impliedly limited the scope of an inherent jurisdiction but rejected that approach: instead, Lord Neuberger rejected the existence of an inherent (common law) power and held that the relief sought was only available under section 426. Bannister J, by contrast, had held that the common law power of assistance did exist, but that it had been "defined" by the Act so as only to be available to representatives from the relevant countries.

That part of the judgment in Re C was not necessary for the decision and therefore obiter, because the foreign representatives were able to invoke assistance under Part XIX.

However, in the light of Singularis, it may now be arguable that that view should be revisited. At paragraph 28 of his judgment in Singularis, Lord Sumption dealt with a similar argument that any common law power to order production of documentation had been impliedly excluded by section 195 of the Bermuda Companies Act, which enabled orders for production of information. The argument was that because section 195 was limited to companies being wound up in Bermuda, it would be inconsistent with the statutory scheme to recognise a common law power which covered the same ground but was not subject to the statutory limitation. The Board rejected that argument. Lord Sumption stated: "The existence of a statutory power covering part of the same ground may impliedly exclude a common law power covering the whole of it. But it does not necessarily do so. An implied exclusion of non-statutory remedies arises only where the statutory scheme can be said to occupy the field. This will normally be the case if the subsistence of the common law power would undermine the operation of the statutory one, usually be circumventing limitations or exceptions to the statutory power which are an integral part of the underlying legislative policy." It was held that section 195 did not evidence a legislative policy adverse to assisting foreign courts of insolvency jurisdiction and that the limitations on the availability of section 195 simply reflected the ambit of the Bermuda Act. The common law power to assist in relation to companies that were outside the Act altogether therefore remained.

Applying that approach to the position in the BVI, it is strongly arguable that Parts XVIII and XIX were not intended to exclude any common law power of assistance. Far from evidencing any legislative policy adverse to assisting foreign courts in relation to insolvency matters they clearly evidence a desire to assist foreign courts. Although those Parts confer additional powers in relation to those situations that fall within their respective ambits, that does not require a conclusion that the more limited assistance available at common law should be abrogated. Further, as noted by Lord Collins in Singularis⁵, section 470 of the Act specifically preserves the power of the court to provide assistance under any other rule of law. While it is true, as noted by Bannister J in Re C, that section 470 refers to "foreign representatives", a term defined by reference to the "relevant countries", the fact that section 470 enables common law powers of assistance to continue to be available to foreign representatives from those relevant countries does not mean that the common law powers are not available to foreign representatives from other countries: the reason section 470 deals only with the relevant countries is simply that it reflects the ambit of Part XIX.

Conclusion

Therefore, leaving aside those foreign companies that can be wound up in the BVI, bringing into play the full powers of the Act (as modified by Schedule 3), it is submitted that there are three levels of assistance open to foreign office holders, albeit only two are presently available:

Footnotes

1. [2014] UKPC 36

2. [2014 UKPC 35

3.The other forms of connection are carrying on business in the BVI (rarely likely to be applicable) and where there is a reasonable prospect that the appointment of a liquidator might benefit the creditors of the foreign company.

4.Which is why in the Saad decision the Privy Council held that the Bermuda Court should not have appointed a liquidator over the Cayman company in question.

5.At paragraph 43 of the judgment.

Alistair Abbott
Litigation and insolvency partner

Alistair is a litigation partner with Forbes Hare, having joined the firm in 2013 from Dentons. He also previously worked at Allen & Overy and Slaughter and May, and has over 16 years' experience advising international clients on large-scale, cross-border commercial and insolvency disputes.

Alistair's practice covers shareholder and warranty disputes, fraud claims, investment-related disputes, agency, insolvency, professional liability, insurance and international arbitration. Alistair has extensive experience of advocacy through his time at the Bar of England and Wales and also as a solicitor-advocate. He frequently appears in the BVI Commercial Court on behalf of clients.

Recent examples of his experience include:

• Acting for the liquidators of Fairfield Sentry Ltd, the largest feeder fund for Madoff, including advising on numerous aspects of the liquidation and appearing on various applications to the BVI Commercial Court
• Acting for the liquidators of Mount Capital Fund Ltd, another Madoff feeder fund
• Advising a creditor regarding its position on the Transfield liquidation
• Acting for a professional trustee company in a Beddoes application to the BVI Commercial Court and on appeal to the Eastern Caribbean Court of Appeal
• Advising bondholders in respect of rights under a trust deed concerning notes issued by a company registered in Curacao
• Acting for a Cayman company in an application for recognition of an ICC award in its favour against a BVI company and in related proceedings for the appointment of provisional liquidators over the BVI company
• Acting for a company registered in Belize in an application for a freezing injunction against a BVI company in respect of claims under a sale and purchase agreement
• Advising a Middle Eastern businessman in respect of potential claims against him by various offshore Caribbean funds which he had promoted
• Advising trustees in bankruptcy of a Hong Kong resident in applications for recognition in the BVI and for various orders for disclosure against registered agents of companies alleged to be associated with the bankrupt

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.