Harneys Corporate Recovery Services Guides to The Insolvency Act 2003 - Part 2

GUIDE 3: ADMINISTRATION

3.1 Introduction

Administration is a brand new insolvency regime that Part III of the Insolvency Act will†introduce into BVI corporate insolvency law when it is brought into force, and its aim is†primarily to provide a corporate rescue mechanism for ailing companies. Its key feature†is a Court order (an Administration Order) which restricts the rights of creditors to†enforce security or take action against the company or its property while it is in force.†During that period, the company's business and affairs are managed by a Court appointed†Administrator who is under a duty to present proposals to creditors for the future of the†company. As quid pro quo for this restriction on creditors' rights, an Administration†Order can be blocked by the holder of a floating charge appointing a qualifying Administrative Receiver.

Administration is modelled on the administration provisions in the UK Insolvency Act†1986 (before those provisions were heavily amended by the Enterprise Act 2002) but†with significant differences: the BVI legislation is even more secured-creditor friendly†than the UK Act pre-amendment. Experience in the UK has shown that the floating†chargee's ability to block Administration has emasculated its impact as a corporate rescue†tool and it has featured in relatively few (albeit high-profile) insolvencies. Our view is†that this is good for banks or anyone with a floating charge.

3.1 When Part III comes into force

Administration Orders will not be available to companies until Part III comes into force†which, it is believed, will not happen until after legislation for Special Purpose Vehicles†(see below) has been enacted.

3.2 Administration Orders not available for all companies

Administration Orders cannot be made in respect of foreign companies98. We believe†that they will not be available for BVI companies that are registered as mutual funds, nor†for particular types of companies called Special Purpose Vehicles (which will be†governed by specific legislation that has not yet been enacted but is expected this year).

3.3 Persons who can apply for an Administration Order

The company or its board of directors can apply for an Administration Order99. English†case law suggests that all the directors acting informally may resolve to make such an†application even where there is no provision in the company's Memorandum and Articles†of Association authorising them to do so100. Further, once a proper board resolution has†been passed, it becomes the duty of all the directors to implement it including those who†abstained from taking part in the decision or indeed those who voted against it101.

A creditor can also apply for an Administration Order102, as can the supervisor of a†creditors' arrangement103, the Financial Services Commission104 (but only in respect of a†company that is a regulated person i.e. it holds a financial services licence, or a company†that is carrying on unlicensed financial services business), and a liquidator105 of the†company if it is in liquidation.

The application can be made by any one or more of the above persons.

3.4 Circumstances when the Court can make an Administration†Order

There are essentially two main conditions that have to be satisfied before the Court, in the†exercise of its discretion, can make an Administration Order.

First, the Court must be satisfied that the company is or is likely to become insolvent106.†Thus, it would have to be shown that the company has not complied with a statutory†demand that has not been set aside, or that execution on a judgment has been returned†wholly or partly unsatisfied, or, most importantly, that it is balance sheet insolvent (i.e. its†liabilities exceed its assets) or unable to pay its debts as they fall due107.

Second, the Court has to be satisfied that there is a reasonable prospect that an†Administration Order "will" achieve one or more of the statutory purposes specified in†section 76(1). These statutory purposes lie at the heart of Administration Orders and they†are discussed in more detail below.

It is important to note the standard of proof that the Court has to be satisfied of i.e. a†reasonable prospect that the statutory purpose(s) "will" be achieved by an Administration†Order. This is in contrast to the equivalent UK provisions where the Court had to be†satisfied that there was a reasonable prospect that an order was "likely to"108 achieve the†statutory purpose(s), which has been interpreted to mean "a real prospect" and the†English Courts have rejected the more stringent test of balance of probabilities109.†However, it remains to be seen how the BVI provision is interpreted because the word†"will" is clearly intended to import a higher standard of proof and require greater cogency†of evidence on the achievement of the statutory purpose(s).

If the conditions are satisfied, the Court has a discretion to make an Administration Order†- it is not obliged to do so110. The Court would balance the interest of those seeking an†Administration Order against the interests of the company, its shareholders and†management who may not want the business taken away from them111.

The Order must be for a specified period. In England, the Courts have generally†favoured an initial period of 3 months.

3.5 The statutory purposes for which an Administration Order†can be made

An Administration Order will only be made in order to achieve one or more of the†statutory purposes set out in section 76(1), most of which are aimed at corporate rescue.†Those purposes are:

(a) the rehabilitation of the company or of one or more companies in a group of†companies of which the company is a member;

(b) the survival of all or any part of the company's undertaking as a going†concern;

(c) the better return for the company's creditors than would result from an†immediate liquidation;

(d) the approval of a creditors' arrangement under Part II of the Act; and

(e) to facilitate an application in aid of foreign proceedings.

The last purpose, i.e. to aid foreign proceedings, is potentially a very useful innovation in†the legislation particularly where a BVI company is subject to insolvency proceedings in†other jurisdictions. For example, an Administration Order could be applied for in order†to aid a foreign liquidation, or to aid Chapter 11 proceedings to which a BVI company†may be subject in the USA, in order to coordinate and harmonise the different insolvency†proceedings.

Depending on the circumstances, the first three purposes may overlap but there are†important differences e.g. the sale of a company's business as a going concern will fall†within the second statutory purpose (and possibly also the third) but not the first, which†contemplates the rehabilitation of the company.

Administration Orders cannot be made to achieve a purpose that is not specified in†section 76(1). Thus, an Administration Order cannot be made in order to make a†distribution to members (although an Order can be made in order to approve a creditors'†arrangement that may involve such a distribution to members)112.

There are situations when the Court is obliged not to make such an Administration Order†and these are quite apart from the situations where the Court, in the exercise of its†discretion, concludes that an Administration Order is not appropriate in all the†circumstances.

3.6 Blocking an Administration Order by appointing a†qualifying administrative receiver

The most important situation when a Court must not make an Administration Order is†when "a qualifying administrative receiver" has been appointed by the holder of a†floating charge. This provision is fundamental to the whole scheme and gives primacy†to the rights of secured creditors by allowing them to block the appointment of an†Administrator.

A "qualifying administrative receiver" is an insolvency practitioner appointed as an†administrative receiver and notice of whose appointment is filed with the Registrar no†later than the day before the date of the hearing of the Administration Order†application113. If these conditions are met, then the Court must dismiss the application†for an Administration Order114. It does not matter whether the administrative receiver†was appointed before or after the application for an Administration Order was filed or†served.

A "lightweight" floating charge e.g. one that encompasses no assets at the time it was†created115, should be sufficient to allow the charge holder to appoint an administrative†receiver and block Administration.

These provisions give primacy to the rights of a secured creditor with a floating charge -†typically a bank - and, if the UK experience is anything to go by, they will almost†invariably block an Administration Order in order to ensure that their security is enforced†for the discharge of their debts, and to retain control of the insolvency process through†the appointment of administrative receivers.

The only situations when a Court can make an Administration Order even though an†administrative receiver has been appointed are where the person entitled to appoint the†administrative receiver consents116, or the Court is satisfied that any floating charge that†would allow the person to appoint an administrative receiver is vulnerable and liable to†be set aside under Part VIII of the Act as a voidable transaction117.

No Administration Order will be made if the company is in liquidation118 (unless it is the†liquidator of the company who is applying for an Administration Order).

3.7 The Moratorium

From the moment that an application for an Administration Order is filed, a statutory†moratorium comes into effect that restricts the rights of secured and unsecured creditors,†as well as those of members, and it is this aspect that is intended to provide an ailing†company with breathing space while rescue attempts are made. Its aim is to lessen the†pressure from creditors by restricting their right of enforcement.

The moratorium commences on...