Harneys Corporate Recovery Services Guides to The Insolvency Act 2003 - Part 1

INDEX

1. Insolvent liquidations.

2. Insolvency Practitioners

3. Administration

4. Administrative Receivership

5. Set off, Netting and Market Contracts

6. Cross-border Insolvency

7. Voidable transactions

8. Malpractice and Disqualification Orders

9. Creditors' Arrangements

GUIDE 1: INSOLVENT LIQUIDATIONS

1.1 Introduction

For insolvent companies a one-track liquidation system has been introduced with two†entry points: first, the passing of the requisite resolution by shareholders and secondly,†by applying to the Court for the appointment of a liquidator by inter alios, the company†itself and creditors. The Act refers only to the "appointment of a liquidator" rather than†the more familiar language of the making of a "winding up order". This is for historical†reasons. In the absence of an Official Receiver as a liquidator of last resort, an†anomalous situation arose in the BVI where companies could be placed into liquidation†without any liquidator being appointed. To preclude this undesirable practice, the†appointment of a liquidator is now a condition for the commencement of liquidation†proceedings in the jurisdiction.

As hinted above, another major change is the creation of a liquidator of last resort with†the introduction of the office of the Official Receiver.

1.2 Appointment of a Liquidator by the Members

Members of an insolvent BVI company have the right to appoint an eligible insolvency†practitioner (but not the Official Receiver) as Liquidator of a company, by passing a socalled†qualifying resolution (one passed by a majority of 75% of the members (or such

higher majority as may be required by the Memorandum and Articles) 1. The insolvency†practitioner must have consented in writing to act as Liquidator prior to the passing of†the resolution.2 Such appointment will not be valid however, if at the time the†resolution was passed there is an application pending before the Court or a liquidator had†already been appointed by the Court3.

This section cannot be invoked by members of a foreign company (i.e. a company that is†not incorporated in the BVI4), who may only liquidate such entity in the BVI by†applying for the appointment of a liquidator by the Court.5†A liquidation initiated by shareholders in this manner is deemed to commence at the time†the liquidator is appointed (i.e. when the qualifying resolution is passed).6

1.3 Appointment of a Liquidator by the Court

There are a number of advantages in a liquidator being appointed by the Court rather†than by the members. A members' appointed liquidator is obliged to call a creditors†meeting within 14 days of his appointment, at which the creditors are entitled to replace†him with their own appointee. This is a statutory safeguard against the practice of†Centrebinding7. Prior to the holding of such meeting the members' liquidator's powers†are limited only to the collecting in and preservation of assets, including the disposal of†perishable goods or such other assets whose value is likely to diminish if not†immediately sold8. To exercise any further powers the liquidator must seek the sanction†of the Court9.

In contrast, a liquidator appointed by the Court immediately enjoys the comprehensive†array of powers set out in Schedule 2 to the Act10 as well as such other powers as the†Court may sanction. A Court appointed Liquidator is not required to call a creditors'†meeting (if he considers a meeting unnecessary ) unless 10 % in value of creditors give†written notice insisting on such meeting11. Further, creditors can only replace a†liquidator appointed by the Court by making an application to the Court pursuant to†section 187 of the Act. A Court appointee cannot be ejected from office in the creditors'†meeting in the same way a members' liquidator is vulnerable to being removed12.

1.3.1 Who can make an application for liquidation

An application for the appointment of a liquidator by the Court can be made by one or†more of the following:

(a) the company or its board of direction:

The company or its board of directors13 may apply for liquidation of the company, and†in this respect section 162(2) of the Act is similar to section 124(1) of the UK†Insolvency Act 1986 which allows a petition to be brought by a board of directors†acting unanimously. The application by the company would be pursuant to a resolution†of the members to make such an application. The reason for allowing the board of†directors to apply for liquidation is to overcome the problem that unless the Company's†Articles of Association specifically confer on the board of directors the power to apply†for the appointment of the liquidator, the board will have no power to do so without a†resolution of the company's members. See: Re Emmadart Ltd [1979] 1 All ER 599,†followed by the Grand Court of the Cayman Islands in the case of Banco Economico -†v- Allied Leasing 1998 CILR,102. It is our view that these would be persuasive†authorities to the Court. It is doubted that the Australian line of cases, which are†5†authority for the proposition that the general powers of managing a company†necessarily include the power of directors to present a petition for the liquidation of the†Company, would have been followed by the Court here in the BVI14. In any event, the†issue has been avoided by specifically enacting that the company's board can apply for†liquidation.

(b) a creditor

The Insolvency Act defines a creditor as a person with a "claim against the debtor,†whether by assignment or otherwise, that is or would be an admissible claimÖin the†liquidation of the debtorÖ15" It is obvious from this that the applicant creditor's claim†must exist against the company at the date the application for liquidation is made, but†need not be immediately enforceable; i.e. if it is a claim which will be enforceable at†some point in the future or upon the fulfilment of some contingency16.

Similarly, a claim where the liability had already been incurred before the date of the†application for liquidation, but the quantum of such liability had not yet been†determined, would also suffice. For example, a judgment creditor of the Company may†apply for the appointment of a liquidator in reliance on a Court order for the payment†by it of costs awarded to the creditor in proceedings, even though the costs have not yet†been taxed17. This is in accordance with the definition in section 10 of "liability"†(which includes a "debt"), and in particular section 10(2), which provides that a liability†may be "Öpresent 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."

A liquidator will not be appointed unless the creditor is owed more than the prescribed†minimum 18 required for a statutory demand which remains outstanding for a period of†3 weeks (and which has not been disputed by the company or set aside by the Court†pursuant to section 156 of the Act), or is a judgment creditor whose debt is unsatisfied.†Alternatively, a liquidator can be appointed if the creditor establishes to the satisfaction†of the Court that the value of the company's liabilities exceeds it assets, or the company†is unable to pay its debts as they fall due.19

(c) a member

Ordinarily, this would mean a person who is a member within the meaning of the†Companies Act (Cap. 285) and the International Business Companies Act (Cap. 291),†and would not normally include a person who, although beneficially interested in the†shares of a company, is not on the register of members or not the holder of shares.†However, the Insolvency Act widens the class of person who are "members" to include†a person to whom shares have been transferred or transmitted by law, even though that†person is not a member of the company within the meaning of the Companies Act20.†Personal representatives and trustees in bankruptcy would be considered "members"†and could therefore apply for liquidation.

At common law a member faces a restriction on his ability to apply for winding-up in†that unless he can show that he has a financial interest in the outcome of the liquidation,†the Court will dismiss his application. So a fully paid up shareholder of a company that†was wholly insolvent could not seek its winding-up because there could be no†distribution to him21.

However, the Insolvency Act appears to reverse that position in section 167(2)(c) which†provides that the Court shall not refuse to appoint a liquidator merely because no assets†would be available for distribution among members.

If a member applies for liquidation on the grounds of insolvency he must first obtain the†leave of the Court, which will not be granted unless the Court is satisfied that prima†facie the company is insolvent22.

(d) the supervisor of a creditors' voluntary arrangement in respect of the company

This is a new provision and, subject to what the Insolvency...