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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 matters discussed in this Briefing, 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

What is it?

Backdating a document refers to the practice of executing a document and dating it with an earlier date than the actual date of execution. The purpose of this practice is usually to try to gain an advantage by giving rise to legal rights before the actual date of execution.

Is it lawful?

Backdating may facilitate, among other things, fraud (or conspiracy to commit fraud), forgery, a misrepresentation, false accounting or a false statement by a company director and therefore is not encouraged as a matter of legal practice in either the BVI or the Cayman Islands.

The above being said, there are a few instances in which it may be permissible to backdate documents as a matter of BVI and Cayman Islands law. For example, the original version of a document may have been lost or damaged. In that instance, it is acceptable to re-execute an identical version of the missing or damaged document in order to replace it. Additionally, if the relevant parties reached an oral agreement on a certain date and documented it in writing at a later date, it would usually be acceptable to include the date of the oral agreement in the written agreement so long as the terms are identical. In both of these cases, though, backdating can only operate where the relevant agreement is executed as a “simple contract” and not as a deed. This is because signing is an integral part of the process of creating rights by way of deed.

Are there any practical workarounds?

If the parties to an agreement governed by BVI law or Cayman Islands law would like an agreement to take effect from a date earlier than the date upon which it was or will be signed and entered into, the parties should expressly state that the agreement is intended to be effective from a date earlier than the date on which the parties entered or will enter into it. Stating that the agreement will be effective from an earlier “effective date” will, however, only be effective as between or among the parties to the agreement. It will not affect those parties’ obligations under the terms of the agreement with regard to third parties who are not privy to the agreement. The obligations to third parties will almost invariably be based on the date that the agreement is fully executed subject to any applicable special circumstances. Any legal opinions delivered by offshore counsel will typically include a qualification to this effect.

What is the general rule?

Subject to the exemptions noted below, the BVI Business Companies Act, 2004 (the “BCA”) provides that any sale, transfer, lease, exchange or other disposition of more than 50 per cent in value of the assets of a BVI company should be made in the following manner:

1. firstly, the sale, transfer, lease, exchange or other disposition should be approved by that company’s board of directors;
2. secondly, following the board approval referenced above, the board of directors should submit details of the disposition to the company’s shareholders for the purposes of authorization by way of a shareholders’ resolution; and
3. thirdly:

1. 1. if the resolution of the company’s shareholders will be passed at a meeting, notice of that meeting, accompanied by an outline of the relevant disposition, should be given to each shareholder; and
   2. if the resolution of the company’s shareholders will be passed in writing, an outline of the disposition should be given to each shareholder.

Therefore, unless an exemption applies, shareholder approval is required with respect to a significant asset disposal by a BVI company. There is no analogous provision of law in the Cayman Islands pursuant to which shareholder approval is required in the context of a disposal.

Although the point is not necessarily settled in case law, the term “assets” is most commonly taken to mean “gross assets valued on an unconsolidated basis”.

What are the exemptions?

Shareholder approval is not required pursuant to the statutory mechanism set out above if the relevant BVI company’s disposition is:

1. permitted pursuant to a provision of its memorandum of association or its articles of association (collectively, the “M&A”) which dis-applies section 175 of the BCA;
2. a mortgage, charge or other encumbrance, or the enforcement thereof;
3. in the usual or regular course of the business carried on by it; and/or
4. intended to comprise a transfer of its assets into trust for the purposes of protecting the assets of the company for the benefit of the company, its creditors and its members and, at the discretion of the directors, for any person having a direct or indirect interest in the company.

It should be noted that there is no specific exemption with respect to a transaction that is completed for fair value and/or is on arm’s length terms.

For the purposes of establishing whether a transaction is in the “usual or regular course of the business” of a BVI company, it is important to have regard to that company’s ordinary business activities. For example, a company which is in the business of buying and selling property will not need shareholder approval to dispose of such property. However, whether a company which owns one property and seeks to dispose of it requires shareholder approval is a matter which is currently subject to a degree of uncertainty. Our view is that such approval should be obtained. In Ciban Management Corporation v Citco BVIHCV 2007/0301, it was held that a disposal of this nature would not require shareholder approval, but this authority should be approached with caution in our view as the BVI company in question had been engaged in the property business and was simply disposing of its last property. The more prudent reading of this exemption, in line with the comments of the Privy Council in Ciban Management Corporation v Citco (BVI) Ltd [2020] UKPC 21, would be to regard the words “course” and “business” as requiring something ongoing in the nature of a commercial enterprise, as opposed to a one-off activity, and to obtain shareholder approval where there is any uncertainty.

What are the consequences of a breach?

The BCA does not set out the consequences of failing to comply with its terms and we are not aware of any caselaw authorities which directly address this point. That being said, it is relatively unlikely in our view that a disposition to an innocent third party would be held to be void or voidable as third parties are generally entitled to assume that the internal management of a BVI company has been properly conducted as a matter of BVI law. Disgruntled shareholders may nevertheless be entitled to exercise their statutory rights to have their shares purchased by the company for fair value in the event of a breach.

What risk mitigation strategies should be considered by a party that is making an acquisition from a BVI company?

A party that is making an acquisition from a BVI company should consider the following risk mitigation strategies:

1. review the BVI company’s M&A to ascertain whether section 175 of the BCA has been dis-applied;
2. obtain a valuation report with respect to the company’s assets to identify whether the disposal may trigger section 175 of the BCA;
3. include a due authorization representation with respect to the BVI entity in the relevant sale agreement;
4. designate shareholder resolutions as a condition precedent to the relevant sale if appropriate, or obtain evidence (such as a certificate from a director) that such resolutions are not required under section 175 of the BCA; and/or
5. obtain a legal opinion as to the legality of the disposal as a matter of BVI law.

What is the position set out in the BCA?

Unlike Cayman Islands law (where the requirement for disclosure of a director’s interests in a transaction is typically set out in a Cayman Islands company’s articles of association instead of in any statute), BVI law includes detailed statutory provisions in the BCA regarding the disclosure of a director’s interests in a transaction.

In summary, sections 124 and 125 of the BCA provide that:

1. unless a transaction is between the director and a BVI company and is entered into in the ordinary course of that company’s business and on usual terms and conditions (the “Rule in Section 124(3)”), a director must disclose any interest in a transaction to be entered into by that BVI company to every other director on the board;
2. a general disclosure by a director that he is a shareholder, director, officer or trustee of another company or other person and is to be regarded as interested in any transaction with that company or person is sufficient disclosure in relation to that transaction; and
3. subject to the provisions of a BVI company’s M&A, a director of a BVI company who is interested in a transaction may:

1. 1. vote on a matter relating to the transaction;
   2. attend a meeting of directors at which a matter relating to the transaction arises and be included in the quorum of that meeting; and
   3. sign a document on behalf of the BVI company, or do any other thing as a director which relates to the transaction.

What are the consequences of non-disclosure under the BCA?

Failure to disclose a conflict of interests under the BVI statutory provisions has two consequences. Firstly, the director commits an offence and is liable on summary conviction to a monetary fine. Secondly, the relevant transaction may be voidable at the instance of the company. However, the transaction will not be voidable if:

1. the director’s interest was not required to be disclosed pursuant to the Rule in Section 124(3);
2. the material facts of the director’s interest in the transaction were known by the company’s shareholders and they approved or ratified it; or
3. the company received fair value for the transaction. “Fair value” is not defined in the legislation and is arguably a question of fact in light of all of the circumstances. That being said, the law does provide that any determination as to whether a company receives fair value shall be made on the basis of the information known to the company and the director at the time the relevant transaction was entered into.

Are the common law rules on conflicts of interest still relevant?

It is important to note that sections 124 and 125 of the BCA do not repeal the common law rules with respect to conflicts of interest. Therefore, directors of BVI companies are well-advised to comply with the statutory provisions set out above as well as their common law duties. The common law duties are also equally applicable to Cayman Islands companies.

What are the common law duties?

Broadly speaking, as a matter of common law, directors must not place themselves in a position where there is a conflict, or potential conflict, between their duties to a BVI company or a Cayman Islands company, and the personal interest or duties they owe to third parties. Failure to adhere to these principles could result in a wide range of remedies being awarded by a court, including the setting aside of the relevant transaction and/or the awarding of damages.

It should be noted that there will be no breach of the common law rules if:

1. the relevant director discloses his interest to the board prior to the transaction;
2. following full and frank disclosure by the relevant director of the conflict to the shareholders of the relevant company prior to the transaction, the shareholders authorize the transaction; or
3. the relevant director acts in accordance with any applicable provisions of the relevant company’s M&A with respect to conflicts of interest.

What risk mitigation strategies should be considered by a third party dealing with a BVI or Cayman Islands counterparty in a transaction?

Parties that are dealing with a BVI company or Cayman Islands company in a transaction should consider the following risk mitigation strategies to ensure that any conflicts of interest have been suitably addressed:

1. review the relevant company’s M&A to identify any applicable provisions with respect to conflicts of interest;
2. review the relevant company’s board resolutions to ensure that all directors have declared their interests in the transaction, or confirmed that there are none;
3. identify and review any relevant shareholder resolutions which have been passed to approve and ratify the transaction; and
4. include a due authorization representation in the relevant transaction document.

Is stamp duty typically payable with respect to a banking & finance or corporate transaction in the BVI or the Cayman Islands?

As a matter of BVI law and Cayman Islands law, there is typically no stamp duty payable in connection with the execution or delivery of a document by a company in the context of a banking & finance or corporate transaction, or the performance of any obligations thereunder. However, there are two noteworthy exceptions to this.

Firstly, stamp duty will be payable in relation to:

1. the transfer to or by a company of an interest in land in the BVI or the Cayman Islands;
2. a transaction in respect of the shares, debt obligations or other securities of a “land owning company”.

A company is a “land owning company” if it, or any of its subsidiaries, has an interest in any land in the BVI or the Cayman Islands.

Therefore, if there is a transfer of shares in a company which owns a subsidiary that has an interest in land in the BVI or the Cayman Islands, that transfer will not be exempt from BVI or Cayman Islands stamp duty.

Secondly, stamp duty will be payable as a matter of Cayman Islands law if a document is executed in, or brought into, the Cayman Islands. This is usually not necessary in the context of a banking & finance or corporate transaction.

What tools are available to ensure that stamp duty is not, and does not, become payable with respect to a transaction with a BVI law and/or Cayman Islands law element?

Parties that are dealing with a BVI company or a Cayman Islands company should consider the following risk mitigation strategies to ensure that material stamp duty is not, and does not, become payable with respect to a transaction:

1. conduct due diligence on the BVI company or the Cayman Islands company (as appropriate) to ensure that it does not directly or indirectly have an interest in land in the BVI or the Cayman Islands;
2. include a representation and undertaking that is given by the BVI company or the Cayman Islands company (as appropriate) in the relevant transaction document to the effect that it does not, and will not, hold an interest in land in the BVI or the Cayman Islands;
3. ensure that any signing instructions direct signatories to execute documents outside the Cayman Islands; and
4. obtain a BVI or Cayman Islands legal opinion, as appropriate.

Does a BVI company which creates security have to maintain an internal security register?

Pursuant to the BCA, a BVI company must record particulars of the security created by it over any of its assets in its register of charges. There is no statutory timeframe within which the register needs to be updated. However, a well-advised secured party will request that the register is updated promptly so that third parties that inspect it are on notice of the security. A BVI company which does not update its register of charges commits an offence and is liable on summary conviction to a monetary fine. This does not invalidate the validity, enforceability or the admissibility in evidence of the charge, however.

Does security created by a BVI company have to be registered in order to be effective?

Pursuant to the BCA, a BVI company (or a BVI legal practitioner authorized to act on its behalf) or the secured party (or a person authorized to act on its behalf) may lodge an application with the BVI Registrar of Corporate Affairs (the “BVI Registrar”) to register a charge created by a BVI company by making a filing, specifying the particulars of charge, in the approved form. The security document itself is not filed or registered as part of the application. Whilst registration is not mandatory and does not affect the validity, enforceability or the admissibility in evidence of the charge, it is almost always completed in practice because it protects the priority of the charge and puts third parties on constructive notice of the existence of the security.

The general rule is that a registered security interest will have priority over any later registered or unregistered security interest over the same asset. The exceptions to this rule are as follows:

1. a secured party may consent or agree to vary the priority of its security interest;
2. a registered floating charge is postponed to a subsequently registered fixed charge unless the floating charge contains a prohibition or restriction on the power of the relevant BVI company to create any future charge ranking in priority to or equally with the floating charge; and
3. a different regime applies to a security interest that was created by a company that was originally incorporated under the International Business Companies Act 1984 and re-registered under the BCA.

The common law rules of priority continue to apply with respect to any unregistered security interests. In general terms, these rules specify that priority between competing security interests is determined by the dates on which the relevant security interests were created.

Does a Cayman Islands company which creates security have to maintain an internal security register?

Pursuant to section 54 of the Companies Act (As Revised) of the Cayman Islands (the “Companies Act”), a Cayman Islands company must record particulars of the security created over any of its assets in its register of mortgages and charges. There is no statutory timeframe within which the register needs to be updated. However, a well-advised secured party will request that the register is updated promptly so that third parties that inspect it are on notice of the security. If a Cayman Islands company does not comply with the aforementioned provisions, every director or officer who authorizes or knowingly and willfully permits such non-compliance is liable to a monetary fine. This does not invalidate the validity, enforceability or the admissibility in evidence of the charge, however.

Does security created by a Cayman Islands company have to be registered in order to be effective?

As there is no statutory regime for registering security interests under Cayman Islands law, the common law rules of priority continue to apply. In general terms, these rules specify that priority between competing security interests is determined by the dates on which the relevant security interests were created. It is important to note that inserting details of mortgages and charges in the register of mortgages and charges of a Cayman Islands company does not confer priority on a charge in respect of the relevant secured asset.

What risk mitigation strategies should be considered by a secured creditor to ensure that the security protection steps referenced above are properly actioned?

A secured creditor dealing with a BVI company and/or Cayman Islands company that has created or will create security in its favour should:

1. include an undertaking in the relevant security document that is given by the BVI company or Cayman Islands company to the effect that it (or its registered agent or registered office provider, as applicable) will update its internal security register to reflect details of the security within an agreed timeframe and provide a certified copy of the updated register to the secured creditor;
2. include an undertaking in the relevant security document that is given by the BVI company to the effect that it will file particulars of the security with the BVI Registrar pursuant to the BCA and provide
3. the stamped particulars of the security and the certificate of registration to the secured creditor upon receipt;
4. notwithstanding the undertaking referenced above, take control of the security registration process in the BVI as permitted under the BCA;
5. designate the applicable security registers and security filings as conditions precedent or conditions subsequent to a financing; and
6. obtain a BVI or Cayman Islands legal opinion, as appropriate.

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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 matters discussed in this Legal Insight, 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

Cayman Islands
The duties of a director of a Cayman company are found in the common law and include (i) the duty to act bona fide in the best interests of the company, (ii) a duty to exercise his or her powers for proper purposes (and not to exercise them for purposes for which they were not conferred), and (iii) a duty not to make secret profits.

British Virgin Islands
The law governing the “duties of directors and conflicts” is set out in Division 3 of Part VI of the BVI Business Companies Act, 2004 (as amended) (the “Act”). These largely mirror the position at common law and include, for example, (i) the duty to “act honestly and in good faith and in what the director believes to be in the best interests of the company”(section 120); (ii) the duty to exercise powers “for a proper purpose” and a requirement that a director “shall not act, or agree to the company acting, in a manner which contravenes this Act or the memorandum or articles of the company” (section 121); and (iii) a requirement that “a director of a company shall forthwith after becoming aware of the fact that he or she is interested in a transaction entered into or to be entered into by the company, disclose the interest to the board of the company” (section 124). It is interesting to note that the Act also provides that a director of a company that is a wholly-owned subsidiary, subsidiary or joint venture company may, subject to certain requirements, act in the best interests of the relevant parent, or in the case of the joint venture company, the relevant shareholders even though such act may not be in the best interests of the company of which he or she is a director.

Cayman Islands
The common law applies to the Cayman Islands such that a director is under a duty to act with reasonable care, skill and diligence in the performance of his or her duties. In the English caselaw authority of Re City Equitable Fire Insurance Co [1925] Ch. 407 it was held that a director need not exhibit in the performance of his or her duties a greater degree of skill than may reasonably be expected from a person of his or her knowledge and experience. This highly subjective test, however, has been met with increasing criticism in more recent years and there is further English caselaw authority to suggest that directors are nevertheless subject to an objective duty to “take such care as an ordinary man might be expected to take on his own behalf” (Dorchester Finance Co v Stebbing [1989] BCLC 498 (decided in 1977)). As such, a distinction appears to be drawn between the duty of skill on the one hand and the duty to take care on the other. However, in Re City Equitable Fire Insurance Co it was further held that “in respect of all duties that, having regard to the exigencies of business, and the articles of association, may be properly left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting to that official to perform such duties honestly.”

British Virgin Islands
In the BVI, the Act provides that “A director of a company, when exercising powers or performing duties as a director shall exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances taking into account, but without limitation:

1. the nature of the company;
2. the nature of the decision; and
3. the position of the director and the nature of the responsibilities undertaken by him or her.”

This duty is qualified by section 123 of the Act to the extent that the director of a company is entitled to rely upon the register of members and upon books, records, financial statements and other information prepared or supplied, and on professional or expert advice given, by:

1. an employee of the company whom the director believes on reasonable grounds to be reliable and competent in relation to the matters concerned;
2. a professional adviser or expert in relation to matters which the director believes on reasonable grounds to be within the person’s professional or expert competence; and
3. any other director, or committee of directors upon which the director did not serve, in relation to matters within the director’s or committee’s designated authority.

However, the relevant director’s reliance on the matters set above is subject to the proviso that in doing so he or she acts in good faith, undertakes a proper inquiry where this is warranted, and has no knowledge that his or her reliance on the register of members or the books, records, financial statements and other information or expert advice is not warranted.

Cayman Islands
The following remedies are available to a shareholder of a Cayman company:

1. A personal action against the company (where the company has breached a duty which is owed to the shareholder personally);
2. A representative action (this is similar to a personal action and would lie for breach of a duty owed to a group of shareholders);
3. A derivative, or multiple derivative claim (this is the most common type of action. See below); or
4. A petition to wind up the company on just and equitable grounds. (This remedy risks placing the company into liquidation although the Cayman Companies Act (2023 Revision) (the “Cayman Companies Act”) provides the Court with the option of making an alternative order. See below).

British Virgin Islands
The shareholders of a BVI company may pursue the following remedies:

1. A personal action under the Act (on the same grounds as at common law in the Cayman Islands);
2. A representative action under the Act. Where a member of a company brings proceedings against the company and there are other members that have the same or substantially the same interest in relation to the proceedings, the Court may appoint that member to represent all or some of the members having the same interest and may, for that purpose, make such order as it thinks fit, including an order:
   1. as to the control and conduct of the proceedings;
   2. as to the costs of the proceedings; and
   3. directing the distribution of any amount ordered to be paid by a defendant in the proceedings among the members represented.
3. A derivative claim under the Act; or
4. An unfair prejudice claim under the Act.

The most common type of remedies sought by minority shareholders are under (iii) and (iv) above. (see below).

Cayman Islands
A derivative action is a claim commenced by one or more minority shareholders on behalf of a company of which they are a member in respect of loss or damage which that company has suffered. Such a claim can only be brought in certain circumstances and amounts to an exception to the rule that a company, as a separate legal person, should sue and be sued in its own name (often referred to as the rule in the English caselaw authority of Foss v Harbottle (1843) 2 Hare 461; 67 E.R 189). In the Cayman Islands the law governing derivative actions is drawn from the common law rather than statute.

British Virgin Islands
While the English common law applies in the British Virgin Islands “members remedies” have been given a statutory footing in Part XA of the Act (see below).

Cayman Islands
As with the majority of actions commenced in the Cayman Islands, derivative claims are normally begun by serving a writ and statement of claim on the relevant defendant or defendants. Grand Court Rules O.15, r. 12A provides that where the defendant gives notice of an intention to defend the claim then the plaintiff must apply to the Court for leave to continue the action. Such an application should be supported by affidavit evidence verifying the facts on which the claim and entitlement to sue on behalf of the company are based. Pursuant to Grand Court Rules O.15 r.12A(8) on the hearing of the application, the Court may grant leave to continue the action for such period and upon such terms as it thinks fit, dismiss the action, or adjourn the application and give such direction as to joinder of parties, the filing of further evidence, discovery, cross-examination of deponents and otherwise as it considers expedient. In Renova Resources Private Equity Limited v Gilbertson and Others [2009] CILR 268, Foster., J affirmed the application in the Cayman Islands of the test to be applied in determining whether to grant leave to continue the action put forward by the English Court of Appeal in the case of Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1981] Ch 257. Foster, J., held that: “(…) there are two elements to this: first the plaintiff [is] required to show prima facie that there [is] a viable cause of action vested in the company and, secondly, that the alleged wrongdoers [have] control of the company (or could block any resolution of the company or the board) and thereby prevent the company bringing an action against themselves.”

British Virgin Islands
The Act provides that subject to certain exceptions “the Court may, on the application of a member of a company, grant leave to that member to (a) bring proceedings in the name and on behalf of that company; or (b) intervene in the proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings on behalf of the company.” Section 184C(2) provides that “without limiting subsection (1), in determining whether to grant leave under that subsection, the Court must take the following matters into account: (a) whether the member is acting in good faith; (b) whether the derivative action is in the interests of the company taking account of the views of the company’s director’s on commercial matters; (c) whether the proceedings are likely to succeed; (d) the costs of the proceedings in relation to the relief likely to be obtained; and (e) whether an alternative remedy to the derivative claim is available.”

Leave to bring or intervene in proceedings may be granted by the Court only if the Court is satisfied that:

1. the company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or
2. it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders or members as a whole.

Such an application for leave should be made to the Court supported by affidavit evidence.

Cayman Islands
In the Renova case the Grand Court held that in appropriate circumstances MDCs would be permitted. In that case, the plaintiff had brought an action in respect of loss incurred by a wholly-owned subsidiary of the company in which it was a shareholder and therefore loss to the subsidiary caused indirect loss to its parent company and shareholders. However, the rule against the recovery of reflexive loss applied such that a shareholder or parent company would not be permitted to claim for indirect losses which mirrored those losses suffered directly by the relevant subsidiary or indeed sub-subsidiary on who behalf action was being brought.

British Virgin Islands
In Microsoft Corporation v Vandem Ltd BVIHCVAP2013/0007 the Eastern Caribbean Court of Appeal held that BVI law which has been codified in this area “does not permit double derivative actions.” However, while the Act does not contemplate multiple derivative actions, there have been other case law authority that have confirmed that multiple derivative actions are available at common law in the BVI. English caselaw authority (which is persuasive authority in the BVI) such as Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] 3 WLR concerning the interpretation of s.260 the English Companies Act, 2006 may open up arguments that such actions are nevertheless available in the BVI at common law.

Cayman Islands
Pursuant to the Cayman Companies Act the Court may wind up a company if it is of the opinion that it would be just and equitable for it to do so. The Cayman Companies Act also provides that where such a petition “is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the Court shall have jurisdiction to make the following orders, as an alternative to a winding-up order, namely –

1. an order regulating the conduct of the company’s affairs in the future;
   an order requiring the company to refrain from doing or continuing an act complained of by the petitioner or to do an act which the petitioner has complained it has omitted to do;
   an order authorising civil proceedings to be brought in the name and on behalf of the company by the petitioner on such terms as the Court may direct; or
2. an order providing for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, a reduction of the company’s capital accordingly.”

British Virgin Islands 
The Act provides that “A member of a company who considers that the affairs of the company have been, are being or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, likely to be oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity, may apply to the Court for an order under this section.”

The Act also provides that “If on an application under this section, the Court considers it just and equitable to do so, it may make such order as it thinks fit, including, without limiting the generality of this subsection, one or more of the following orders –

1. in the case of a shareholder, requiring the company or any other person to acquire the shareholder’s shares;
2. requiring the company or any other person to pay compensation to the member;
3. regulating the future conduct of the company’s affairs;
4. amending the memorandum and articles of the company;
5. appointing a receiver of the company;
6. appointing a liquidator of the company under the Insolvency Act on the grounds specified in section 162(1)(b) of the Insolvency Act;
7. directing the rectification of the records of the company;
8. setting aside any decision made or action taken by the company or its directors in breach of the Act or the memorandum or articles of the company.”

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Gary is a Partner in the Corporate Group of Loeb Smith Attorneys whose practice focuses principally on Corporate, Investment Funds, M&A, and Corporate Restructurings.

Profile: Gary Smith
E: gary.smith@loebsmith.com

In August 2023, Aubit presented a petition for the appointment of Restructuring Officers under the Regime on the basis that (1) Aubit was unable to pay its debts due to its inability to access approximately US$60.4m (which was held in a combination of fiat currencies and cryptocurrencies through its broker in Greece); and (2) Aubit intended to present a compromise or arrangement to its creditors, all in accordance with section 91B of the Act (the “Petition”).

The Petition also had considerable support from Aubit’s creditors – 126 letters of support were noted (including creditors connected with Aubit’s management) .

However, it was conceded by Aubit that its proposed restructuring was “unusual, if not unique” because it needed to take place in two distinct phases. The first phase essentially amounted to an information gathering phase and which would enable the restructuring plan to be formulated whilst the second phase would be pursuit of such restructuring plan once Aubit’s financial position had been properly established.

In support of the Petition, counsel for Aubit cited section 91B(4) of the Act which provides that the Court may confer powers and the ability to perform certain functions on appointed Restructuring Officers, and which could include the ability to gather missing information with a view to subsequently presenting a restructuring plan. It was acknowledged by Aubit that the order sought by it would, if granted, be in the “widest scope of powers that any Court had ordered to date” .

Aubit argued that the authority of the Restructuring Officers (if appointed) would greatly assist in the quest to obtain the missing information and documentation.

In consideration of the Petition’s merits, the Court noted prior case law and the specific provisions of section 91B of the Act and found that when considering applications for the appointment of Restructuring Officers, there are a number of issues the Court should consider. The published judgment in Aubit listed 25 such considerations but for the purposes of this article, we would specifically note the following :

1. previous case law which dealt with the appointment of restructuring or “light touch” provisional liquidators are likely to be relevant and persuasive;

2. before Restructuring Officers can be appointed pursuant to section 91B of the Act, the burden is on the applicant to demonstrate to the Court that both limbs of that section are satisfied on a balance of probabilities;

3. whilst it was acknowledged that the Court’s powers are wide, the Court must be satisfied that it is in the interests of those with a financial stake in the relevant company for the company to be rescued and the Court must guard against abuse of the Regime by companies who are “hopelessly insolvent” but wish to continue to trade. The need to guard against abuse is particularly acute in the context of the statutory moratorium which is provided for by section 91G of the Act which applies from the submission of the petition for the appointment of Restructuring Officers and which prevents any “suit, action or other proceedings, other than criminal proceedings” from being brought against the company ;

4. due weight should be given by the Court to the wishes of creditors, with whom the company should “positively and constructively engage”. The Court will expect to see evidence of such engagement prior to a petition to appoint Restructuring Officers being presented as the position of unsecured creditors is “paramount”. More weight will be given by the Court to the views of creditors who aren’t connected with the company’s management;

5. to satisfy the first limb of section 91B of the Act (requirement for the company to be insolvent), this must be supported by credible evidence either from the relevant company or other source. The second limb of section 91B (restructuring plan) must be satisfied by showing the Court “credible evidence of a rational proposal with reasonable prospects of success” and such plan has or will potentially be supported by a majority of the company’s creditors as an alternative to liquidation;

6. the intention to submit a restructuring plan for the purposes of section 91B must be a “realistic, genuine, bona fide held intention on adequate grounds, even if it is only provided “in outline” – the requirement is not to present the Court with “the finished fully grown plant but the seeds must be sufficient to suggest that it is likely the plant will bear some fruit before too long”, it being noted that abstract or hypothetical restructurings will not meet the required standard. With this in mind, in most cases the Court will find a two-phase process (where the first phase is information / document gathering) “unattractive”;

7. the Court will often benefit from independent evidence of the merits of a restructuring over winding-up. The views of management will be considered in this respect but the potential for scrutiny of their behaviour by liquidators may skew their views;

8. the company’s management should be able to provide an accurate assessment of the company’s financial position to the Court, the suggestion therefore being that if management cannot do this, an application for the appointment of Restructuring Officers may be premature. To this end, petitioners should have “all their ducks in a row” before seeking to appoint Restructuring Officers; and

9. creditors and companies cannot confer jurisdiction to appoint Restructuring Officers on the Court – the Court needs to be satisfied that it is entitled to exercise its discretion to approve any appointment which will arise when it is objectively satisfied that the requirements of section 91B are met.

In Aubit, the Court held that Aubit had satisfied the first limb of the test in section 91B on the grounds that it had itself conceded its inability to pay its debts, which is sufficient to meet this limb.

In relation to the second limb in section 91B, the Court concluded that the information concerning the proposed restructuring plan was “extremely limited” and “is devoid of any meaningful detail” . Indeed, in relation to the “Short Restructuring Plan” which had been submitted, the Court made the pointed observation that “no one has, understandably, had the courage to identify themselves as the author” . Accordingly, the Court was not able to conclude that there was a genuine intention to present a meaningful restructuring plan which had a reasonable prospect of success. Accordingly, the second limb of section 91B was not satisfied and so the Petition was dismissed by the Court.

Interestingly, the Court stated that it was not satisfied that the proposed two-phase process suggested by Aubit was appropriate “in the circumstances of this case”. This therefore suggests that it might be appropriate in some limited cases although this was not expanded upon in the judgment.

On the matter of creditor support for the Petition, the Court noted that whilst many creditors had confirmed their support for the appointment of Restructuring Officers, they had not expressed support for any particular restructuring plan, as a satisfactory one didn’t exist.

It appeared to the Court that the primary motivation behind the Petition was to assist Aubit in continuing forensic investigations into its affairs, commencing legal proceedings, obtaining assets, documentation and information and to add respectability and credibility to the management of Aubit. The Court observed that this is not a “proper use” of the Regime .

The Court also concluded that even if it had been sympathetic to Aubit’s submissions, it did not have the jurisdiction to appoint Restructuring Officers in any event as Aubit had “failed to get out of the starting blocks” by not being able to satisfy the second limb of section 91B of the Act .

It would be understandable for some practitioners or companies who are considering whether the Regime is the right option for them, to be dissuaded by the judgment in Aubit. However, as the Court was at pains to stress in its reasoning, the facts of this case were most unique. Provided a company is able to submit a restructuring plan (or at the very least an outline restructuring plan that has a reasonable prospect of being successful), unlike Aubit, there is every chance that a petition will succeed, subject to the other statutory requirements.

If anything, in our view, the judgment in Aubit is to be welcomed as it serves to provide a useful illumination of the path that the Court will follow when considering future petitions to appoint Restructuring Officers pursuant to the Regime.

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Profile: Robert Farrell

Robert is a Partner in the Corporate Group of Loeb Smith Attorneys whose practice focuses on Corporate, Corporate Finance, Investment Funds, and Corporate Restructurings.

E: robert.farrell@loebsmith.com

Tel: +1 (345) 749 7499