British Virgin Islands

A liquidator of a British Virgin Islands (“BVI”) company which is in insolvent liquidation can make various applications against current directors or former directors of the company. This includes any shadow or de facto directors. The relevant legislation is the Insolvency Act 2003 (as amended). This Briefing sets out the (potential) liability of directors of a BVI company which is in insolvent liquidation. For the purposes of this Briefing, “directors” mean current directors or former directors (including shadow or de facto directors).

Misfeasance

On the application of the liquidator, the court may make an order where it is satisfied that a director:

has misapplied or retained, or become accountable for any money or other assets of the company; or
has been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.

The court may make one or more of the following orders against the director, namely that they:

repay, restore or account for the money or other assets, or any part of it;
pay to the company as compensation for the misfeasance or breach of duty such sum as the court considers just; and
pay interest to the company at such rate as the court considers justs.

The court shall not make an order (as stated above) unless it has given the director the opportunity to:

give evidence, call witnesses and bring other evidence in relation to the application; and
be represented (at their own expense) by a legal practitioner who may put to them, or to other witnesses, such questions as the court may allow for the purpose of explaining or qualifying any answers or evidence given.

Fraudulent trading

On the application of the liquidator, the court may make an order where it is satisfied that, at any time before the commencement of the liquidation of the company, any of its business has been carried on:

with intent to defraud creditors of the company or creditors of any other person; or
for any fraudulent purpose.

The court may declare that any director who was knowingly a party to the carrying on of the business in such manner is liable to make such contribution, if any, to the company’s assets as the court considers proper.

Any money paid to, assets recovered or other benefit received by the liquidator as a result of an order made are deemed to be assets of the company available to pay unsecured creditors of the company.

Insolvent trading

On the application of the liquidator, the court may make an order against a person who is or has been a director of the company if it is satisfied that:

at any time before the commencement of the liquidation, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation; and
they were a director of the company at that time.

The court may order that the person concerned makes such contribution, if any, to the company’s assets as the court considers proper. However, it should be noted that the court shall not make such an order if it is satisfied that after the director first knew, or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation, they took every step reasonably open to them to minimise the loss to the company’s creditors.

The facts which a director ought to know or ascertain, the conclusions which they ought to reach and the steps reasonably open to them which they ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both:

the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company; and
the general knowledge, skill and experience that that director has.

Fraudulent conduct

Where a liquidator of a company is appointed by the court, a person who is or has been an officer of the company is deemed to have committed an offence if, at any time whilst an officer or during the period of 12 months preceding the commencement of the liquidation, they have:

made or caused to be made any gift or transfer of, or charge on, or has caused, permitted or acquiesced in the levying of any execution against the company’s assets; or
concealed or removed any of the company’s assets since, or within, 60 days of the date of any unsatisfied judgment or order for the payment of money obtained against the company.

A person is not guilty of a fraudulent conduct offence:

by reason of conduct constituting an offence under sub-paragraph (a) above which occurred more than 5 years before the commencement of the liquidation; or
if they prove that, at the time of the conduct constituting the offence, they had no intent to defraud the company’s creditors.

Disqualification orders

In addition to the above, a disqualification order may be made against a director. A disqualification order is an order that a person shall not, for the period specified in the order, engage in a prohibited activity without the leave of the court. A person engages in a prohibited activity if, inter alia, they are a director of a company. An application for a disqualification order may not be made more than 6 years after the date on which the company concerned became insolvent. However, it should be noted that applications to the BVI courts for disqualification orders tend to be less common that the other applications mentioned in this Briefing because only the Official Receiver (and not liquidator) may apply to the court for a disqualification order against a person.

Further Assistance

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on the matters covered in this Briefing, please contact your usual Loeb Smith attorney or any of the following:

E: gary.smith@loebsmith.com

E: robert.farrell@loebsmith.com

E: edmond.fung@loebsmith.com

E: elizabeth.kenny@loebsmith.com

E: vivian.huang@loebsmith.com

E: faye.huang@loebsmith.com

E: yun.sheng@loebsmith.com

Hong Kong (December 2, 2024) – We are very pleased to announce that our Firm has been recognised in The ALB Fast 30 list for a second year in a row.

This recognition reinforces the firm’s growth strategy, the determination and dedication of our teams in Hong Kong, Cayman Islands, and the BVI to contribute to providing high quality technical legal advice and commercial solutions, and outstanding client service, and continuous drive to stay at the forefront of the fast-changing business and technological landscapes in Asia.

We value that ALB appreciates the rapid and robust growth of Loeb Smith in the past year.

View Full PDF

The British Virgin Islands (“BVI”) is a very user-friendly jurisdiction for enforcing foreign judgments and arbitral awards.

The Reciprocal Enforcement of Judgments Act 1922 (“1922 Act”) and the common law governs the enforcement and registration of foreign judgments in the BVI.

The Arbitration Act 2013 (as revised) (“Arbitration Act”) governs the enforcement of arbitration awards in the BVI. The Arbitration Act does not distinguish between domestic and foreign awards but does in relation to awards (“Convention Awards”) under the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (“New York Convention”) and non-New York Convention awards (“non-Convention Awards”).

The New York Convention was extended to the BVI by the United Kingdom Government in 2014.

Foreign Monetary Judgments

The jurisdiction where the judgment was obtained will determine which procedure (i.e. the 1922 Act or the common law) is used to enforce the foreign monetary judgment.

1922 Act

Monetary judgments from the following jurisdictions are covered under the 1922 Act:

England and Wales;
Scotland;
Northern Ireland;
New South Wales;
the Bahamas;
Barbados;
Bermuda;
Belize;
Guyana;
Grenada;
Jamaica;
Nigeria;
St Lucia;
St Vincent; and
Trinidad and Tobago.

The 1922 Act provides a simplified registration process for judgments originating from one of the abovelisted jurisdictions. In order for a foreign monetary judgment to be recognised, the judgment from the foreign court must be for a specified sum of money and be final and conclusive on the merits. The BVI court must be satisfied that the foreign court had jurisdiction over the judgment debtor, and that they were duly served. Registration would be prevented if, among other things, the judgment was obtained by fraud or registration of the judgment would be against public policy.

A monetary judgment from a jurisdiction which is covered by the 1922 Act can be registered in the BVI for enforcement as if it were a BVI judgment (the judgment will have the same force and effect as if it was a BVI judgment from the date of its registration). An application for registration of a foreign judgment under the 1922 Act may be made without notice but must be supported by affidavit evidence, together with a certified copy of the foreign judgment and a certified English translation (if necessary).

It should be noted that a judgment is registrable within 12 months of the date of the judgment if (in all the circumstances of the case) the court thinks it is just and convenient to enforce the judgment in the BVI. The 12-month period can be for such longer period as may be allowed by the BVI court.

Common law debt claim

A judgment that is not from a jurisdiction that is subject to the 1922 Act cannot be registered. Notwithstanding this, a judgment creditor can normally commence a common law claim in the BVI court for the judgment sum as a cause of action for debt in itself so that there is no retrial of the issues. Such a debt claim on the foreign judgment must be commenced within 12 years of the judgment becoming enforceable.

Any arrears of interest on the foreign judgment debt cannot be recovered after six (6) years from the date on which the interest was due.

The foreign judgment must not be impeachable. It must also, among other things, be for a debt or definite sum of money as well as be final and conclusive.

A common law claim is commenced via a Claim Form and Statement of Claim. An affidavit must also be included (exhibiting a certified copy of the foreign judgment and, if relevant, a certified English translation).

After the claim is served, the judgment creditor will generally be able to apply for either:

1) default judgment (if no acknowledgement of service or defence is filed); or
2) summary judgment (on the grounds of the doctrine of obligation by action or estoppel).

The BVI court will not look again at the merits of the foreign judgment. A common law debt claim is not generally a lengthy or complicated process. If judgment is granted on the judgment creditor’s common law debt claim, it is enforceable like any other BVI judgment.

Foreign Non-Monetary Judgments

In the BVI, there is only the indirect enforcement of non-monetary judgments. Where a judgment creditor has a foreign judgment which is based on a cause of action that is recognised under BVI law and can establish that the courts in the BVI have jurisdiction over the judgment debtor, then the cause of action can be brought in the BVI by the judgment creditor. The cause of action or the issue(s) are not re-litigated because of the foreign judgment and the principles of estoppel. It should be noted that the BVI claim must seek to determine an identical issue or question to that which was determined in the foreign proceedings and given in proceedings between identical parties.

Arbitral Awards

The recognition and enforcement of arbitral awards are governed by the Arbitration Act.

Convention Award

A Convention Award is enforceable in the BVI either:
1) by instituting an action in court; or
2) applying to seek leave of the court.

Non-Convention Award

A non-Convention Award can only be enforced by seeking leave of the court.

Leave to enforce arbitral award

The requirements and procedure which are applicable to both a Convention Award and a non-Convention Award are the same.

An application for the recognition and enforcement of a foreign arbitral award is made by way of a Fixed Date Claim Form supported by affidavit evidence. The evidence must, among other things:

• exhibit the original or a certified copy of the award (and, if relevant, a certified English translation); and
• exhibit the original or certified copy of the arbitration agreement (where applicable).

The Fixed Date Claim Form must be served on the award debtor. In the event that the award debtor is located outside the jurisdiction, the award creditor must serve out of the jurisdiction.

If leave is granted, the award has the same effect as a BVI court judgment or order and can be enforced using the remedies provided for under the Eastern Caribbean Supreme Court Civil Procedure Rules which apply in the BVI. The order must be served on the award debtor. The award debtor has the right to apply to set aside the decision.

Refusal to enforce a Convention Award

The enforcement of a Convention Award may only be refused if the person against whom enforcement is sought proves one of the Convention defences. The defences include:

the arbitration agreement was invalid under the applicable law, or if there was no indication of the applicable law, under the law of the country where the award was made;
the party was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings, or was otherwise unable to present their case; and
the award has not yet become binding on the parties or has been set aside or suspended by a competent authority of the country in which, or under the law of which, it was made.

The party against whom enforcement action is taken against has the burden of proof to demonstrate that one of the applicable circumstances applies

Refusal to enforce a non-Convention Award

The grounds for refusal of enforcement of a non-Convention Award are the same as for a Convention Award. However, there is the additional ground where the court has a wider discretion to refuse enforcement on its own volition if it considers it just to do so.

Enforcement of Foreign Judgments and Arbitration Awards in the BVI

Once the foreign judgment or arbitration award become a BVI judgment, it can be enforced by:

a charging order;
garnishee order;
judgment summons;
an order for the seizure and sale of goods; and
an order for the appointment of a receiver.

From a practical standpoint, the enforcement of any foreign judgment or arbitration award in the BVI is only effective if the judgment debtor has assets in the BVI against which the foreign judgment or arbitration award can be enforced. This will usually be in the form of shares in a BVI company. The most common way to enforce is to seek a charging order over the shares in the relevant BVI company owned by the judgment debtor. Procedurally, this is done by joining the BVI company to the proceedings and applying for a provisional charging order (“PCO”). The PCO can then be made final. The application for the PCO does not need to be served on the judgment debtor but the order (once granted) needs to be served. It should be noted that the judgment debtor can oppose the PCO being made final. If in the event that the PCO is made final, the judgment creditor can apply for the appointment of a receiver and an order for sale.

Appointment of a liquidator

Notwithstanding the above, the judgment creditor can instead apply to appoint a liquidator over the judgment debtor (where the latter is a BVI company) to wind up the judgment debtor on the basis that the foreign judgment or arbitration award is unpaid. The liquidator can then apply the proceeds of the liquidation to the satisfaction of the judgment debtor’s debts, including the relevant foreign judgment or arbitration award. It is normal to serve a statutory demand on the judgment debtor company first in such a situation (although this is not strictly required under the laws of the BVI).

View Full PDF

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on the matters covered above, please contact your usual Loeb Smith attorney or any of the following:

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: edmond.fung@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com

The Financial Services Commission (FSC) of the British Virgin Islands (BVI) has published guidance on what is required of persons registered under the Virtual Assets Service Providers Act 2022 (VASP Act) to comply with the “Travel Rule” (Guidance).

The “Travel Rule”, introduced by the Financial Action Task Force (FATF) in 2019 was a major step in addressing anti-money laundering (AML), counter-terrorism financing (CFT) and counter proliferation financing within virtual assets ecosystems. Initially impacting traditional financial institutions only, the Travel Rule has since been extended to Virtual Asset Service Providers (VASPs), obligating them to comply with similar regulations to mitigate risks associated with money laundering, terrorist financing, and proliferation financing.

The Guidance outlines the key obligations and considerations for VASPs and also their directors and officers.

What is the Travel Rule and what are its implications?

The “Travel Rule” refers to a global regulatory requirement for financial institutions, including VASPs, to share information about the originator and beneficiary of cryptocurrency transactions above a certain threshold. This rule, initially developed by the FATF as Recommendation 16 for combating money laundering and terrorism financing, is applied to virtual asset transactions to promote transparency and improve security within the digital asset ecosystem.

The rule mandates that VASPs collect and transmit identifiable information about the parties involved in a transaction (e.g., name, account number, and address) to the next financial institution in the transaction chain when transferring amounts above the designated limit, often set around US$1,000. This requirement helps law enforcement track potentially illicit transactions, aiming to reduce criminal activity and enhance trust within web3.0 ecosystems.

However, implementing the Travel Rule can be challenging, as blockchain transactions are pseudonymous by nature. VASPs must develop technological solutions to enable information sharing while balancing privacy concerns. Some crypto exchanges and wallet providers are working to establish compliance protocols and technical standards to address these regulatory requirements and support international efforts against financial crime.

In the BVI, the Travel Rule has been incorporated into direct legislation through amendments to the AntiMoney Laundering Code of Practice and the Anti-Money Laundering Regulations (together the AML Regime). VASPs registered under the VASP Act are required to comply with the Regime and will be required to demonstrate how the VASP will comply with them as part of the application process under the VASP Act. These regulations effectively place VASPs under the scope of the FATF’s global AML/CFT framework.

The Guidance

The Guidance offers useful additional information to registered and prospective VASPs on a number of points.

It is recognised that the Directors and Senior Officers of a VASP are ultimately responsible for ensuring that the VASP adheres to the AML Regime and other applicable laws. The Guidance specifically references section 25 of the VASP Act, which requires VASPs to “take appropriate steps to comply with the requirements of [the VASP Act] and other enactments relating to money laundering, terrorist financing and proliferation financing and shall…put in place appropriate systems and procedures to ensure such compliance”.
Whilst the Guidance recognises that a VASP may engage a third-party contractor to assist in compliance with the Travel Rule, this does not obviate the VASP of all responsibility. In particular, the Guidance requires that the VASP should risk assess the third-party contractor both prior to engagement and during the continuance of the relationship.
In addition to compliance with the Travel Rule under BVI laws, VASPs must monitor, on an ongoing basis, the implementation of the Travel Rule in other jurisdictions as part of its continued assessment of counterparty risk.
VASPs are required to take reasonable steps to ensure that their counterparties in jurisdictions that have not yet fully implemented the Travel Rule can properly receive and handle the necessary information during virtual asset transfers. If a jurisdiction has not fully implemented the Travel Rule, BVI VASPs must retain all relevant transaction data, which can be shared with the FSC and law enforcement agencies.
Conversely, when receiving funds from a foreign VASP whose jurisdiction has not yet fully implemented the Travel Rule, the BVI VASP should consider all relevant risks (e.g. country risk, missing information etc.) prior to making the virtual assets available to the beneficiary. In such a situation, the BVI VASP could use blockchain analytics to assist with its risk assessment of the foreign VASP.
Transfers of virtual assets with a value not exceeding US$1,000 are out-of-scope of the Travel Rule, unless there are reasonable grounds for suspecting the funds/assets being transferred are connected with money laundering, terrorist financing or proliferation financing. Linked transactions, where multiple transfers from the same originator to the same beneficiary occur over a short period, must be treated as linked transactions for regulatory purposes. For example, a number of successive transactions of US$999 between the same originator and beneficiary will be suspect, and VASPs are required to have systems in place which track such attempts.
Other virtual assets which are out-of-scope of the Travel Rule include transfers where both the originator and the beneficiary hold accounts with the same VASP and transfers between two VASPs who are acting on their own account.
Transfers where the same individual or entity are both originator and beneficiary (e.g. where the individual or entity has an account with two different VASPs) are within scope of the Travel Rule, as are transfers between entities in the same group of companies.
The regulations emphasise that VASPs must maintain strong controls to detect missing or incomplete information and ensure appropriate responses. For example, a VASP would be expected to delay or refuse a transfer until the required data is obtained.
The responsibility for compliance with the Travel Rule extends also to ‘intermediary VASPs’, who participate in transactions without being the originating or beneficiary VASP. These intermediaries must verify that all necessary information is received and fully document any decision to delay or continue affected transactions.
One of the more challenging areas for VASPs is managing transfers to and from unhosted wallets. Unhosted wallets are not directly linked to a VASP, which complicates the verification of beneficial ownership and control. BVI VASPs are expected to adopt a risk-based approach to assess the risks associated with these transfers. In higher-risk cases, additional verification methods, such as the “Satoshi Test” or “Address Ownership Proof Protocol,” can be employed to verify ownership of
the unhosted wallet.
If sufficient information about the ownership and control of an unhosted wallet cannot be obtained, BVI VASPs must block the transfer and report the suspicious activity to the relevant authorities. The importance of robust verification measures cannot be overstated, as they play a critical role in mitigating risks associated with unhosted wallets, which are often used in illicit activities due to their anonymity.

Conclusion

The extension of the FATF Travel Rule to VASPs represented a significant shift in the regulatory landscape for virtual asset businesses. This Guidance, whilst perhaps overdue, is nonetheless welcome. Compliance with the Travel Rule is not only a legal obligation but also a key aspect of maintaining trust in the virtual asset ecosystem and in the BVI as a respected offshore jurisdiction. The BVI’s approach to implementing the Travel Rule reflects a broader trend toward regulatory harmonization, ensuring that VASPs adhere to global standards.

For virtual asset businesses, the implications are clear: robust AML/CFT frameworks must be in place which are sufficiently sophisticated and nuanced to identify and stop attempts to circumvent scrutiny. Such policies also need to include detailed policies on how to handle transfers involving jurisdictions with incomplete Travel Rule implementation or those involving unhosted wallets. These businesses must also stay informed about the evolving regulatory environment, as non-compliance can result in significant penalties and reputational damage, both for the VASP and for the BVI more generally.

The Travel Rule is a crucial tool in the global fight against financial crime. Virtual asset businesses must play their part and take proactive steps to comply with international standards. Given the rapidly evolving nature of virtual assets, staying ahead of regulatory developments will be essential for maintaining compliance and ensuring sustainable growth in the sector.

Further Assistance

This publication is not intended to be a substitute for specific legal advice or a legal opinion. If you require further advice relating to the application of the Travel Rule for BVI VASPs, please contact us. We would be delighted to assist.

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E. elizabeth.kenny@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com
E: yun.sheng@loebsmith.com

Loeb Smith Attorneys is pleased to announce that our team has been rated as a Leading Firm in client satisfaction 2024 by the Legal 500.

Every year the Legal 500 team speak to clients and peers about the top law firms around the globe.

After in-depth client feedback research for over a 6-years period and all aspects of law firm practice were analyzed and measures based on client service and customer experience from responsiveness, efficiency, communications, billing transparency, through lawyer quality and industry profile, only the firms in the top percentile firms receive this kite mark badge to recognize the high level of customer satisfaction they are delivering.

Loeb Smith Attorneys is very proud to have received this ranking from the Legal 500 as it comes from direct engagement with our clients. Special thanks to our much-valued clients and partners as their continued trust and support in us are the key reasons for our achievement.

This achievement is another testament to our team’s expertise and Loeb Smith Attorneys’ commitment in client services.

With offices in the British Virgin Islands, the Cayman Islands and Hong Kong, Loeb Smith Attorneys has won numerous awards over this year and has achieved high rankings in well-known international legal directories.

Loeb Smith Attorneys is pleased to announce that our Hong Kong team has been ranked on the firms to watch list published by Asian Legal Business

Hong Kong’s status as a global financial centre has fostered a highly competitive legal market. Fast growing law firms have emerged as significant contributors, demonstrating exceptional capabilities and a deep understanding of local business needs. ALB continues to identify and recognise these standout firms for their achievements.

With offices in the British Virgin Islands, the Cayman Islands and Hong Kong, our latest accolade is another testament to our team’s expertise and Loeb Smith Attorneys’ commitment in Asia.

Visit ALB to read the announcement:

https://www.legalbusinessonline.com/features/rankings-alb-hong-kong-firms-watch-2024

About Loeb Smith Attorneys

Loeb Smith Attorneys is one of the leading offshore corporate law firms considered one of the most active and knowledgeable firms for advising on offshore investment funds formation and launch of all asset classes including public securities, private equity, venture capital, real estate, and virtual assets. Other areas of strength and growth are advising on M&A, Finance, Corporate Restructurings, Capital Markets, Regulatory Compliance, Investments, Logistics, Shipping and Aviation.

Considered a leading law firm in the Fintech and Blockchain Technology space, Loeb Smith also advises on token issuances, application for VASP licences for Web 3.0 businesses, Metaverse infrastructure and other virtual asset service providers, and utilising Cayman and BVI structures to develop virtual asset platforms for DAOs. Loeb Smith’s clients are investment managers, financial institutions, onshore counsels, and HNWIs who the firm advises on day-to-day legal issues and complex, strategic matters.

Some of our firm’s recent accolades are: winning Leading Firm in Client Satisfaction 2024 award by Legal 500; ranked in Investment Funds category and listed as one of the Firms To Watch for Corporate & Commercial by Legal 500 in 2024; named as Recommended Firm by IFLR 1000 from 2021 to 2024; named in Offshore Client Choice List by Asian Legal Business from 2021 to 2023; ranked amongst Top 30 Asia’s Fastest Growing Law Firms by Asian Legal Business in 2023 and 2024; ranked in The A-List: Top Offshore Lawyers by Asia Business Law Journal in 2022 and 2024; named as one of the ALB Hong Kong Firms to Watch 2024; winning Best Law Firm – Fund Domicile at Hedgeweek US Emerging Manager Awards 2023 and 2024; winning Best Law Firm – Fund Domicile at Private Equity Wire US Emerging Manager Awards 2023 and 2024; winning Best Law Firm – Fund Domicile at Private Equity Wire US Awards 2023; and winning The Best Offshore Law Firm – Client Service at With Intelligence HFM Asia Services Awards 2024.

In certain circumstances, the liquidator of a British Virgin Islands (“BVI”) company may be able to set aside certain transactions which took place in the lead up to the company’s liquidation. It is important for those concerned with the affairs of a BVI company that they are aware of the statutory powers available to the liquidator.

For a corporate liquidation in the BVI, there are four types of voidable transactions set out in the Insolvency Act 2003 (as revised). The voidable transactions are not necessarily mutually exclusive. They are:

An unfair preference;
An undervalue transaction;
A floating charge that is voidable; and
An extortionate credit transaction.

Key definitions in relation to voidable transactions

There are various key definitions which are applicable to more than one type of voidable transaction and they are as follows:

i. Vulnerability period

In order for a transaction to be challenged, the transaction in question must have been entered into during the “vulnerability period”.

For the purposes of unfair preferences, undervalue transactions, and voidable floating charges, the “vulnerability period” means:

1. in the case of a transaction entered into with, or a preference given to, a connected person, the period commencing two (2) years prior to the onset of insolvency and ending on the appointment of the liquidator; and
2. in the case of a transaction entered into with, or a preference given to, any other person, the period commencing six (6) months prior to the onset of insolvency and ending on the appointment of the liquidator.

For the purposes of an extortionate credit transaction, the “vulnerability period” means the period commencing five (5) years prior to the onset of insolvency and ending on the appointment of the liquidator.

ii. Onset of insolvency

The way a liquidator is appointed is relevant. The “onset of insolvency” is defined as either:

1. the date on which the application for the appointment of the liquidator was filed, where a company is in liquidation and the liquidator was appointed by the Court; or
2. the date of the appointment of the liquidator, where a company is in liquidation and the liquidator was appointed by the members.

iii. Connected persons

The definition of “connected persons” is relevant in relation to all voidable transactions.

In relation to a company, “connected person” means any one or more of the following:

1. a promoter of the company;
2. a director or member of the company or of a related company;
3. a beneficiary under a trust of which the company is or has been a trustee;
4. a related company;
5. another company one of whose directors is also a director of the company;
6. a nominee, relative, spouse or relative of a spouse of a person referred to in paragraphs (1) to (3) above;
7. a person in partnership with a person referred to in paragraphs (1) to (3); and
8. a trustee of a trust having as a beneficiary a person who is, apart from this paragraph, a connected person.

A company is related to another company if:

1. it is a subsidiary or holding company of that other company;
2. the same person has control of both companies; and
3. the company and that other company are both subsidiaries of the same holding company.

In relation to an individual, “connected person” means any one or more of the following:

1. a relative, spouse or relative of a spouse of the individual;
2. a person in partnership with the individual;
3. a relative or spouse of a person in partnership with the individual;
4. a company in respect of which they are a connected person as defined above;
5. a trustee of a trust having as a beneficiary a person who is, apart from this paragraph, a connected person.

iv. Insolvency transaction

A transaction is an “insolvency transaction” if:

1. it is entered into at a time when the company is insolvent; or
2. it causes the company to become insolvent.

The liquidator, in challenging unfair preferences, undervalue transactions and/or floating charges must satisfy the Court that the transaction in question is an “insolvency transaction”.

Unfair preference

A transaction entered into by a company is an unfair preference given by the company to a creditor if the transaction:

1. is an insolvency transaction;
2. is entered into within the vulnerability period; and
3. has the effect of putting the creditor into a position which, in the event of the company’s insolvent liquidation, will be better than the position they would have been in if the transaction had not been entered into.

If the transaction in question is entered into by a company with a connected person within the vulnerability period, there is a presumption that the transaction was an unfair preference and that it did not occur in the ordinary course of business. This presumption can be rebutted if the contrary can be proved.

A transaction is not an unfair preference if it is entered into in the ordinary course of business. For example, this would apply to trade creditors and financing which is entered into by the company at arm’s length.

Undervalue transaction

A company enters into an undervalue transaction with a person if:

1. the company makes a gift to that person or otherwise enters into a transaction with that person on terms that provide for the company to receive no consideration; or
2. the company enters into a transaction with that person for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company; and
3. in either case set out above, the transaction concerned is an insolvency transaction and is entered into within the vulnerability period.

A transaction is not an undervalue transaction if the company enters into the transaction in good faith and for the purposes of its business and at the time of the transaction, there were reasonable grounds for believing that the transaction would benefit the company.

Where a company enters into a transaction with a connected person within the vulnerability period and the transaction falls within paragraph (1) or paragraph (2) above, unless the contrary is proved, it is presumed that the transaction was an insolvency transaction and the company did not enter into the transaction in good faith and for the purposes of its business and there were no reasonable grounds for believing that the transaction would benefit the company.

Floating charge that is voidable

A floating charge created by a company is voidable if it is created within the vulnerability period and it is an insolvency transaction.

A floating charge is not voidable to the extent that it secures:

1. money advanced or paid to the company, or at its direction, at the same time as, or after, the creation of the charge;
2. the amount of any liability of the company discharged or reduced at the same time as, or after, the creation of the charge;
3. the value of assets sold or supplied, or services supplied, to the company at the same time as, or after, the creation of the charge; and
4. the interest, if any, payable on the amount referred to in paragraph (1) to paragraph (3) above pursuant to any agreement under which the money was advanced or paid, the liability was discharged or reduced, the assets were sold or supplied or the services were supplied.
5. Where a company creates a floating charge in favour of a connected person within the vulnerability period, unless the contrary is proved, it is presumed that the charge was an insolvency transaction.

Extortionate credit transaction

A transaction entered into by a company within the vulnerability period for, or involving the provision of, credit to the company is an extortionate credit transaction if, having regard to the risk accepted by the person providing the credit:

1. the terms of the transaction are or were such as to require grossly exorbitant payments to be made (whether unconditionally or in certain contingencies) in respect of the provision of credit; or
2. the transaction otherwise grossly contravenes ordinary principles of fair trading.

Orders in respect of voidable transactions

Where the Court is satisfied that a transaction entered into by a company is a voidable transaction, the Court, on the application of the office holder (e.g. administrator, its liquidator, or its provisional liquidator):

1. may make an order setting aside the transaction (in whole or in part);
2. in respect of an unfair preference or an undervalue transaction, may make such order as it considers fit for restoring the position to what it would have been if the company had not entered into that transaction; and
3. in respect of an extortionate credit transaction, may by order provide for any one or more of the following:
  1. the variation of the terms of the transaction or the terms on which any security interest for the purposes of the transaction is held;
  2. the payment by any person who is or was a party to the transaction to the office holder of any sums paid by the company to that person by virtue of the transaction;
  3. the surrender by any person to the office holder of any asset held by them as security for the purposes of the transaction; and
  4. the taking of accounts between any persons.

Without prejudice to the generality of the Court’s power to make such order as it considers fit for restoring the position to what it would have been if the company had not entered into the unfair preference or undervalue transaction, an order may, among other things, require any assets transferred as part of the transaction to be vested in the company.

It should be noted that there are limitations on orders made by the Court where it has determined that there is an unfair preference or an undervalue transaction. Such orders must not:

prejudice any interest in assets that was acquired in good faith and for value from a person other than the company, or prejudice any interest deriving from such an interest; or
require a person who received a benefit from the transaction in good faith and for value to pay a sum to the office holder, except where that person was a party to the transaction or, in respect of an unfair preference, the preference was given to that person when they were a creditor of the company.

Any money paid to, assets recovered, or other benefit received by the liquidator as a result of an order made in relation to a voidable transaction are deemed to be assets of the company available to pay unsecured creditors of the company.

View Full PDF

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on unfair prejudice claims in the BVI, please contact your usual Loeb Smith attorney or any of the following:

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E. elizabeth.kenny@loebsmith.com
E: edmond.fung@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com
E: yun.sheng@loebsmith.com

All shareholders of a company incorporated in the British Virgin Islands (“BVI”) have certain rights and protections. However, the imbalance of voting powers within a company can result in the controlling majority conducting the affairs of the company in a manner that is prejudicial to the rights of the minority shareholders. This article will explore the BVI court’s approach to situations where there is conduct that is alleged to be unfairly prejudice to the shareholder.

BVI Business Companies Act 2004 (as amended) (“BCA”)

The protection of minority shareholders of a BVI company is codified in section 184I of the BVI Business Companies Act 2004 (as amended) (“BCA”). Minority shareholders of BVI companies can petition the BVI court for redress if they consider that the affairs of the company have been, are being, or are likely to be, conducted in a manner that is oppressive, unfairly discriminatory or unfairly prejudicial to them. Under section 184I, the court has discretion to protect the rights of minority shareholders and to provide relief against the company and those in control of it. If the court considers it just and equitable to do so, it can make an order as it thinks fit, including:

requiring the company or any other person to acquire the shareholder’s shares;
requiring the company or any other person to pay compensation to the shareholder;
amending the company’s memorandum or articles;
appointing a liquidator of the company; and
setting aside any decision made or action taken by the company or its directors in breach of the BCA or the memorandum or articles of the company.

No order under section 184I may be made against the company or any other person unless the company or that person is a party to the application which is brought before the court.

Objective test

The test for what amounts to unfair prejudice in any case is an objective one (and not subjective). As stated in Re Bovey Hotel Ventures Ltd (31 July 1981, unreported), it is not necessary for a petitioner to show that those in control of the company had intended their actions were unfair or had acted in bad faith. The test for unfair prejudicial behaviour is whether a reasonable bystander who observed the consequences of the defendant’s conduct would regard it as having unfairly prejudiced the petitioner’s interests.

In order for a shareholder to succeed in a claim for unfair prejudice, the shareholder must also show that the conduct which is complained of was unfairly prejudice towards him/her.

Case law

The Privy Council in Yao Juan v Kwok Kin Kwok & Crown Treasure [2022] UKPC 52 (“Crown Treasure”) considered the elements of a BVI unfair prejudice claim and the appropriate remedies. Crown Treasure concerned the affairs of Crown Treasure, a BVI company (the “Company”). Madam Yao and Madam Kwok had entered into an oral agreement to develop and operate a luxury hotel in the People’s Republic of China (“Project”). They both held 50% of the shares in the Company (which was the vehicle through which they would hold their respect interests in the Project). Each party needed the consent of the other party in order to transfer their shares in the Company. Madam Kwok was at all material times the sole director of the Company. Madam Yao contended that she would provide much of the funding and would need to be notified by Madam Kwok about any major decisions, transactions or dealings and would need to consent to all major decisions. Madam Yao complained that without notifying or consulting her (let alone obtaining her consent) Madam Kwok entered into certain transactions that locked in her capital investment for 40 years and led to a dilution of the Company’s stake in the Project.

A claim was therefore brought by Madam Yao before the BVI Commercial Court on the grounds that the Company’s business affairs (and its subsidiaries) were conducted in a manner that was and is oppressive, unfairly discriminatory and/or unfairly prejudicial in her capacity as a shareholder of the Company. Madam Yao sought relief, and the appointment of a liquidator of the Company. The trial judge found, inter alia, that Madam Kwok’s conduct was clearly unfairly prejudicial and ordered that the Company be liquidated.

On appeal, the Court of Appeal allowed the appeal in part, concluding that whilst the trial judge was entitled to find that certain acts were proven to be unfairly prejudicial, he was wrong to find that Madam Kwok had breached her agreement with Madam Yao in other respects. The Court of Appeal therefore held that the trial judge was wrong to appoint joint liquidators and the Court of Appeal granted more limited relief to govern the Company’s future conduct.

Madam Yao successfully appealed to the U.K. Privy Council (the court of final appeal for BVI litigation matters) which upheld the trial judge’s findings of unfair prejudice and reinstated the liquidation order over the Company. It was held that the oral agreement between the parties had entailed a duty to notify and consult each other of major decisions. Madam Kwok, by entering into a loan agreement which had a repayment date of 2045 was an example of unfair prejudice conduct. The unfair prejudice to Madam Yao was due to not having the opportunity to be heard on the intended terms of the loan agreement (given the onerous nature of the conditions of the loan and the effect of those terms on her shareholding).

Liquidation order as an appropriate remedy

It can be seen from section 184I of the BCA that the court has wide discretion as to the relief granted once unfair prejudice has been established. The most common remedy which is sought by a petitioning shareholder and which is granted by the court is requiring the majority to acquire the shares held by the minority. However, the court is not limited to reversing the conduct or correcting the conduct which lead to the granting of the order. Another U.K. Privy Council case, Ming Siu Hung and others (Appellants) v J F Ming Inc and another (Respondents) (British Virgin Islands) [2021] UKPC 1, held, inter alia, that once unfair prejudice has been established, the court is entitled to look at the reality and practicalities of the overall situation, past, present and future. The BVI court is entitled to have regard to the facts in relation to the history of the company and the relationship between the shareholders, and between them and the directors (which includes those which occur after the issue of the claim). The court’s discretion means that “nothing is off-limits, subject only to the twin tests of relevance and weight”.

Notwithstanding the fact that the court has discretion to grant various remedies and the most common one is a buy out of the minority’s shareholding, the court can also grant an order appointing a liquidator over the company. As stated above, in Crown Treasure, the U.K. Privy Council reinstated the liquidation order. Even though Madam Kwok had argued that the liquidation of the Company would not be the appropriate remedy as a liquidation order is a remedy of last resort, the Privy Council upheld the trial judge’s finding that a liquidation order was the appropriate remedy in this situation. The trial judge had found that a liquidation order was the most appropriate remedy for a number of reasons including the fact that the parties were equal shareholders owing 50% of the Company each. This meant that the case could fall into one of the categories which were highlighted in Hollington on Shareholders’ Rights (8th edition) that would justify a liquidation order where there is unfair prejudicial conduct. The court also noted that the categories in Hollington were not exhaustive and therefore it did not limit the court’s discretion to grant a liquidation order.

Conclusion

Crown Treasure demonstrates the BVI court’s approach to an unfair prejudice claim and the fact that it will not hesitate to use its wide discretion to grant a liquidation order if the facts of the case justifies such an order. A liquidation order will wind up the company at the centre of the dispute, and a liquidator, once appointed, will have extensive powers to investigate the company’s affairs. Some situations do not require such draconian relief, whilst in other cases it is the only appropriate relief.

A petitioner, before seeking relief under section 184I, should consider not only the extent of the unfair prejudicial conduct they have experienced, but also the commercial, practical and legal effect of the remedy sought as well as the conduct of the defendant(s). Careful planning of an application under section 184I is needed. By doing so, this will increase the chances of not only convincing the court to grant the order sought, but also ensure that any relief eventually granted will be what the petitioner had required.

View Full PDF

Please contact a member of our team who will be able to discuss further with you on unfair prejudice claims and to guide you through the process.

Introduction

Initial Coin Offerings (ICOs), used during the past few years as a source of raising capital for early stage blockchain projects, have started to appear so frequently in the financial and/or IT media during the last couple of years that they now seem to be part and parcel of the new social economy. Ethereum launched itself in 2014 by way of an ICO and is now the second largest crypto-currency. According to an ICO-tracking initiative by Coindesk.com, coin and/or token sales worth in excess of US$2.2 billion have been recorded to date.

In brief, ICOs represent a type of unregulated crowdfunding built on blockchain technology and use of cryptocurrencies. Coins or tokens may be issued to represent virtual currencies, equity interests, voting rights, units which are part of a company-wide reward or bonus scheme, membership interests, pre-paid services or products, etc.. However, together with all legitimate ICOs came over 2,000 phishing, hacks or Ponzi schemes, which led to rising interest and warnings from regulators worldwide, especially since another criticism related to ICOs is that investors rush to buy coins/tokens in the hope of “flipping” them later in the market without any due diligence or regard to the value of the underlying product, project or company.

In the first issue of our series dedicated to FinTech-specific risk factors which may impact the Cayman Islands fund industry, we focused on risk factors related to bitcoin and other cryptocurrencies in general (see Top Ten Risks for the Crypto-Currency Investor: A View from the Cayman Islands). In this second issue, we will take a closer look at ICOs, including views from regulators in various countries, and discuss certain provisions of the existing Cayman Islands laws which may be triggered in connection with an offering of coins / tokens.