Cross Border Issues Facing a BVI Liquidator

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1 March 2011 Cross Border Issues Facing a BVI Liquidator There were approximately 460,000 active companies incorporated in the British Virgin Islands ( BVI ) as at the end of September BVI companies are often used as holding companies, particularly by individuals and corporations in the Far East. They are frequently part of complex group structures and hold valuable shares in underlying operating companies. There are a number of reasons why a liquidator in the BVI ( Liquidator ) may be appointed over a company, for example because of unpaid debts, allegations of fraud or other improper conduct, shareholder or other commercial disputes or a group restructuring. The amount of information available to the Liquidator varies from case to case, but it is often limited and the office holder is usually required to undertake extensive investigations to identify assets and gather information generally. Assets of BVI companies are almost invariably held outside the jurisdiction, so even after a Liquidator has identified assets, he can face considerable difficulties securing and realising them. This article concentrates on the powers available to a Liquidator, both in the BVI and in some foreign jurisdictions frequently encountered in BVI liquidations, to identify and secure assets. The Registered Agent The starting point for the Liquidator is to write to the company s Registered Agent ( RA ) to give notice of his appointment and obtain the company s statutory books and records¹. The records held by the RA will usually include the company s M&A, Registers of Directors, Members and Charges and potentially, minutes of meetings or resolutions of the directors or members. Sometimes bank account information is held by the RA and there is usually general correspondence with the client. The RA is also required to hold (or to be able to obtain upon request from its professional introducer) the identity and appropriate due diligence on the company s ultimate beneficial owner ( UBO ). In addition to writing to the directors, members, any auditors or lawyers and UBO, the Liquidator s initial enquiries will be driven by the information contained in the books and records provided by the RA and any information provided by the creditors. ¹Pursuant to the BVI Business Companies Act, 2004, every BVI registered company must, at all times, have a registered agent and a registered office in the BVI.

2 Investigative powers The Liquidator has powers under the BVI Insolvency Act, 2003 (the Act ) to obtain information from various parties and assist him in investigating the affairs of a company, including: Section274(A) Delivery up of assets and documentation to a Liquidator Where any person has in their possession or control assets or documents which company appears to be entitled, the Liquidator can apply to Court for an order for them to be delivered up. Section 277 Statement of Affairs Certain specified persons can be required to submit a Statement of Affairs setting out the assets and liabilities of the company. This extends to any officer of the company within 2 years prior to the appointment of the Liquidator, any employee capable of providing the information, officers or employees of any corporate director and any person who has promoted the formation of the company. Section 282 Power to obtain information from specified persons A Liquidator can require specified persons to provide such information concerning the company, its promotion, formation, business dealings or accounts, as reasonably required. Such persons include any officer or former officer, any member or former member, any person involved in promotion or formation of the company, any person employed under contract for service or any receiver, accountant or auditor. Section 283 Examination by office holder The Liquidator can require persons who fall within section 282 to attend a private examination, which can be conducted by either the office holder or a legal practitioner. Section 284 Examination by the Court The Liquidator can make an application to Court to examine persons before the Court, concerning the promotion, formation, business dealings, accounts, assets, liabilities and affairs of the company or a connected company. This applies to any of the parties specified in section 282, or any other person the Liquidator thinks capable of providing information or who is in possession or control of assets or indebted to company. The examination can be public or private and the Court can order the examinee to produce books, records or other documents in their control. Whilst the above powers are of assistance to a Liquidator seeking information from parties located in BVI, in the vast majority of cases, the Liquidator will be dealing with persons or entities located in other jurisdictions. If overseas persons refuse to provide information on a voluntary basis or simply fail to respond to the Liquidator s reasonable requests, there is little that can be done to enforce the Liquidator s powers, without seeking assistance of foreign courts. Other Remedies It is worth mentioning the role of Norwich Pharmacal orders when a Liquidator is seeking information from parties in the BVI. In the case of Norwich Pharmacal co v Commissioners of Customs & Excise, the House of Lords ruled that where a person,

3 albeit innocently and without incurring any personal liability, became involved in the tortious acts of others, he came under a duty to assist a party injured by those acts by giving him full information. In the BVI, Norwich Pharmacal orders have proved to be highly useful in obtaining information, especially from Registered Agents, in certain circumstances. A recent BVI decision in the JSC BTA Bank case c h a n g e d t h e u n d e r s t a n d i n g o f t h e circumstances where an order could be made. The BVI Court found that the innocent provision of incorporation or registered agent services were insufficient grounds for making an order, the applicant had to demonstrate that the registered agent was involved or participated in an alleged wrongdoing. In the context of the level of disclosure available in the BVI, it would be impossible for an applicant to demonstrate such involvement. The decision was successfully appealed and the status quo ante restored. Assistance from foreign Courts The remainder of this article, focuses on three jurisdictions which frequently feature in BVI liquidations, namely, Hong Kong SAR, the United Kingdom and the United States. Hong Kong In a recent case where William Tacon of Zolfo Cooper and Rod Sutton of FTI in Hong Kong were appointed as liquidators of a BVI company which had significant connection to Hong Kong, we were advised by a leading lawyer that there is no process under Hong Kong law by which a foreign Liquidator can seek the assistance of the Hong Kong Courts. We therefore had to adopt the alternative approach of commencing an ancillary winding up and in that case were appointed as provisional liquidators, full liquidation may ensue. The Hong Kong Court will exercise its jurisdiction to wind up an unregistered (foreign) company if it can be shown that there is a sufficient nexus with Hong Kong and that a Hong Kong winding up order will be of benefit to the creditors. Factors which the Court is likely to take into account include: Assets located in Hong Kong; The existence of Hong Kong based creditors; Whether the directors or officers are resident in Hong Kong; and If the company s books and records are held in Hong Kong. After being appointed by the Hong Kong Court as Liquidator or Provisional Liquidator of the company, the BVI office holder will be afforded all of the powers available to Liquidators under the Hong Kong Companies Ordinance. This includes the power to apply to the Hong Kong Court under section 221 of the Companies Ordinance to examine before the Court any officers, persons known or suspected of having property of the company or any person capable of giving information concerning the company. Similar to section 282 of the BVI Insolvency Act, the examinations may be under oath and the examinee can be required to produce books, records and other papers relating to the Company. This is a powerful weapon in a Liquidator s arsenal when he is faced with uncooperative directors and other parties such as banks who may hold information, especially bank account statements and other transaction records, vital to the investigation into the company s affairs. United Kingdom The UNCITRAL Model Law on cross-border insolvency law ( UNCITRAL ) provides for co- operation between the UK Courts and foreign liquidators. If the Liquidator believes that there are persons who hold or have knowledge of company records and

4 assets, the Liquidator may apply, pursuant to Article 15 of the UK Cross Border Regulations to the UK Court for recognition in the UK Court. If the Liquidator is successful in obtaining this recognition, he may, pursuant to Article 21 of the Cross-border insolvency law apply to the UK Court for similar powers that are available to a Liquidator appointed in the United Kingdom pursuant to the Insolvency Act 1986, the most relevant for this article being providing for the examination of witnesses, taking of evidence or delivery of information concerning the debtors, assets, affairs, rights, obligations or liabilities of the company. The powers available under these sections are broadly similar to those BVI powers referred to above in Investigative powers. Even prior to the incorporation of the UNITRAL model law, the UK courts have demonstrated a willingness to be pragmatic and co-operative when faced with requests for assistance from BVI Liquidators under section 426 of the UK Insolvency Act In a recent case where William Tacon acted as Court Appointed Receiver, we located bank accounts in the UK. The bank concerned, understandably, felt unable to pass records to us without a UK Court Order. We made an application for assistance under section 426, the Order requested was made and disclosure occurred. United States of America Section 1782 of Title 28 of the United States Code ( Section 1782 ) Section 1782 provides that a Court in the US may order the production of documents or testimony for use in a foreign proceeding upon the request of an interested person. A powerful tool is the availability of a 2 day deposition of a respondent, with an official court transcript. The applicant will need to demonstrate three things to the Court: the applicant is an interested person in a foreign proceeding; the proceeding is before a foreign tribunal; and the person from whom evidence is sought is in the district of the Court before which the application has been filed. We have obtained discovery pursuant to Section 1782 on a number of cases, including where William Tacon has successfully applied while acting as Liquidator and a Court Appointed Receiver, and have found the 1782 procedure to be cost effective, quick, powerful and highly effective. Chapter 15, Title 11, United States Code ( Chapter 15 ) Recognition of a foreign liquidator under Chapter 15 of the US Bankruptcy Code allows a US bankruptcy court to grant to a foreign representative most of the relief available to a trustee appointed under Chapter 11 and 7 of the Code. However, a foreign liquidator is not given relief to pursue avoidance actions under the terms of the Code. William Tacon and Richard Fogerty have had recent success in this regard, they were appointed as Joint Official Liquidators of Condor Insurance Limited, a Nevis company. They succeeded in obtaining Chapter 15 recognition and then sought to apply avoidance provisions available under Nevis law within the US. In the first instance, this

5 application was rejected but subsequently allowed after appeal to the 5th Circuit Court of Appeal. This decision will prove to be immensely useful to overseas office holders who gain Chapter 15 recognition in view of the additional powers conferred. There have been other recent cases which show how the law is developing in the US, especially following the historical uncertainty of when recognition will be granted after the decision in Bear Stearns. In a recent case, the liquidators of Fairfield Sentry Limited, a BVI Madoff feeder fund, sought Chapter 15 recognition some 18 months after the commencement of the liquidation. Judge Lifland seemed to have no difficulty making an order, he accepted that the BVI liquidators had been carrying out the liquidation of a BVI company as from the BVI. The liquidators have subsequently been able to bring avoidance actions under BVI law against redeemed shareholders in the fund. Conclusion This article seeks to demonstrate that the armory of powers available to a liquidator or other office holder of an offshore company is wide, varied and effective. However, determined opposition from adverse parties, who may have something to hide, can make the tracing and enforcement process time consuming, expensive and not for the faint of heart. Persistence of a good case will often yield results, a determined office holder with adequate funding, usually wins in the end. Confidential Discussion? Should you have any matters which you would like to discuss, or need any more information about the topic dealt with in this article, please contact either William Tacon or David Griffin. Zolfo Cooper P.O. Box 4571, 2nd Floor, Palm Grove House, Tortola, British Virgin Islands T: F: William Tacon Managing Partner T: E: william.tacon@zolfocooper.vg David Griffin Director T: E: david.griffin@zolfocooper.vg This publication does not constitute professional advice. Whilst every care has been taken in its preparation please note that it is intended as general guidance only. Before acting upon any information provided within this publication you should consult with a suitably qualified professional advisor. Zolfo Cooper accepts no liability for any loss sustained by any person who chooses to rely on this publication. Copyright Zolfo Cooper (BVI) Limited All rights reserved.