British Virgin Islands: Harneys Corporate Recovery Services Guides to The Insolvency Act 2003 - Part 3

GUIDE 5: SET-OFF, NETTING & MARKET CONTRACTS

The provisions dealing with set-off and market contracts in liquidation may rightly be regarded as one of the show-cases of the BVI Insolvency Act, for they contain an important innovation: they exempt market contracts and netting agreements from insolvency set-off (and other provisions of the Insolvency Act), and are governed instead by sections 434 and 435 of the Act which in effect validate such netting arrangements through insolvency. The provisions are based on the ISDA Model Netting Act. All other debts are subject to the insolvency set-off regime in sections 149 – 154 which, although based on Rule 4.90 of the English Insolvency Rules, contain a number of clarifying provisions which will bring much greater certainty to this vital, but difficult, area.

The regime for insolvency set-off does not represent a conceptual change from existing BVI law and, while based on Rule 4.90 of the English Insolvency Rules, represents an improvement on both English law and current BVI law by introducing a number of clarifying provisions. The set-off applies all liquidations however commenced and also applies to the liquidation of foreign companies in the BVI. It also applies to administration²⁵² (but not to administrative receivership or voluntary arrangements).

Section 150(1) provides that where before the "relevant time" there have been mutual credits, mutual debts or other mutual dealings between a company and a creditor claiming or intending to claim in its liquidation, then:

(a) an account shall be taken of what is due from each party to the other in respect of those mutual credits, mutual debts or other mutual dealings, as at the relevant time;

(b) the sum due from one party shall be set-off against the sums due from the other party; and

(c) only the balance of the account, if any, may be claimed in the liquidation or is payable to the company.

The "relevant time" is the time of the commencement of the liquidation²⁵³ which is the time when a liquidator is appointed²⁵⁴.

English case law confirms that insolvency set-off, where it applies, is mandatory²⁵⁵ and there is no discretion to dispense with it²⁵⁶ even though it may result in a breach of the pari passu principle in that a creditor may effectively receive payment in full of his debt. What makes the BVI legislation particularly attractive is that many of the uncertainties which surrounded the previous BVI law (and indeed English law) have been removed.

Thus, netting arrangements in market contracts are specifically exempt from insolvency set-off. A creditor can validly waive or contract-out of the benefit of the set-off provisions before liquidation, and such waiver or contract will be effective²⁵⁷. Debt subordination agreements and acknowledgments are also effective.

There are detailed provisions dealing with the quantification of contingent claims or claims where the amount is uncertain²⁵⁸, and debts that are payable in the future will be discounted in accordance with the Rules²⁵⁹. Where rent or payments of a periodical nature are involved, the Act provides that the claim may include any amount due and unpaid, and where a payment was accruing due at the commencement of liquidation, it can be treated as if it had been accruing from date to day and that amount claimed²⁶⁰. There are also detailed provisions dealing when interest can be included in a claim and the amount of such interest²⁶¹.

However, set-off does not apply to claims by a creditor where he has actual notice that the company was insolvent at the time when he gave credit to the company or he acquired a claim against it²⁶². Insolvency in this context has a restricted meaning and does not include balance sheet insolvency but is essentially confined to the cash flow basis²⁶³. The creditor must have actual knowledge of the company’s insolvency.

This innovative feature of the Insolvency Act is based on the ISDA Model Act and its purpose is to preserve the sanctity of netting arrangements in market contracts even when the company goes into liquidation.

The scheme of the legislation is straightforward: the provisions relating to set-off are made subject to section 434²⁶⁴ which, together with section 435 deal with netting agreements between two parties in relation to "financial contracts". "Financial contracts"will be defined in the Insolvency Rules²⁶⁵ (to maintain flexibility and will cover a multitude of market contracts) but it is our belief that it will be broad enough to encompass all standard derivatives and market contracts.

Section 435(1) provides that "Notwithstanding anything contained in this Act or the Rules or in any rule of law relating to insolvency…" the provisions relating to netting in relation to financial contracts contained in netting agreements remain legally enforceable. The same applies to credit support agreements, the set-off of money provided by way of security, the enforcement of a guarantee, the enforcement and realisation of collateral²⁶⁶, and the set-off of proceeds contained in netting agreements, and master netting agreements are also included²⁶⁷. Section 435 is widely drafted so as to exempt such arrangements from all insolvency provisions such as voidable transactions, stays or moratoria in administration.

We have already provided opinions on the scope of this provision and the enforceability of netting arrangements in the liquidation of BVI companies.

The provisions are, however, confined to financial contracts between two parties, and do not include multi-party arrangements²⁶⁸. A party is not confined to a company and could include an individual, and could include a person acting in his own capacity or as a trustee or nominee.

Also, the exemption from the effects of the Insolvency Act does not apply if there is fraud or misrepresentation²⁶⁹, nor does the section confer validity on the netting etc if any provision in the agreement between the two parties was void for fraud or misrepresentation²⁷⁰.

In this guide we discuss some of the more common cross-border issues that could arise in international insolvencies. This is a topic of considerable importance to BVI companies incorporated under the International Business Companies legislation (IBCs) whose international dimensions – their management and business is almost invariably carried on outside the BVI – mean that cross-border issues will be thrown up in the event of their insolvency.

This guide is not a comprehensive survey of all possible cross-border issues, nor does it cover litigation and tactical issues, that could arise in insolvency as we would advise on those on a case-by-case basis. The purpose of this guide is to highlight common issues and how the law of the BVI has been affected by the Insolvency Act 2003, and they will be discussed under the following headings:

(a) Insolvency regimes that can be initiated in the BVI

(b) Effect of a liquidation in the BVI; and

(c) Foreign liquidations and BVI and foreign companies.

Under this heading we examine the jurisdiction of the BVI in respect of foreign companies in insolvency matters.

BVI corporations can be the subject of all the insolvency regimes provided in the Insolvency Act and discussed in more detail in the other guides i.e. Liquidation, Administration, Administrative Receivership, and Creditors’ Arrangement, and there is no requirement that they must have carried on business in the BVI or indeed have any connection with the BVI other than their incorporation. The regimes in the Act apply simply because of their incorporation in the BVI.

The position with foreign companies, i.e. companies incorporated outside the BVI²⁷¹, is different. They can enter into Liquidation (through a Court appointed Liquidator) provided that they have a "connection" with the BVI²⁷². Connection for these purposes has a statutory definition and means the presence of assets in the BVI, the carrying on of business here; or a reasonable prospect that the appointment of a Liquidator here will benefit the creditors of the company²⁷³. Even if such connection is established, the BVI Court retains a discretion whether or not to appoint a liquidator. This is discussed in more detail in Guide 1 on Liquidation.

Administrative Receivership under the Insolvency Act is also open to foreign companies for there is nothing in the Act restricting this procedure to BVI companies. However, for a foreign company to take advantage of this procedure, two requirements would have to be fulfilled: (a) the creditor is the holder of a valid floating charge²⁷⁴; and (b) the appointment of a licensed insolvency practitioner i.e. an individual resident in the BVI who holds an appropriate licence from the Financial Services Commission²⁷⁵.

With regard to a valid floating charge, the effect of a charge not governed by BVI law is open to some debate. In our view, there is no reason why a foreign law document (e.g. governed by English or Hong Kong law) which the BVI Court can analyse as having the same characteristics as a BVI floating charge will not suffice. However, there is as yet no authority on the point and the prospect of having to adduce expert evidence as to foreign law at the hearing of an Administration application is not a happy one. The answer is really to put the matter beyond doubt by having a floating charge governed by BVI law.

Administration²⁷⁶ and Creditors’ Arrangements²⁷⁷ are not available to them. However, Part XIX of the Insolvency Act introduces the ability of BVI Courts to act in aid of insolvency proceedings in certain foreign countries, and allows them to make orders that would be akin to the moratorium in Administration e.g. orders to restrain proceedings against the company or its property²⁷⁸ and to restrain the enforcement of rights against the company’s property²⁷⁹ but not the rights of secured creditors to take possession of and realise property covered by their security²⁸⁰, or such order as it considers appropriate to facilitate or implement arrangements that will result in co-ordination of a BVI insolvency with a foreign insolvency²⁸¹. Part XIX finds its genesis from section 426 of the UK Insolvency Act which has allowed the English Court to make Administration orders²⁸² and Creditors Voluntary Arrangements²⁸³ for foreign companies on request from a foreign Court.

When a company goes into liquidation its assets become impressed with a trust for the benefit of those entitled to them under the Act and in accordance with its provisions, as enunciated in the well known case of Re Oriental Inland Steam Company.²⁸⁴ It is our view that this principle applies to Liquidations in the BVI of BVI companies as well as foreign companies (because when a Liquidator is appointed his principal duties, as set out in section 185(1) of the Act, are to realise the assets of the company and distribute them in accordance with the Act, which in effect creates a statutory trust).

The scope of this principle should be carefully considered. First, it is not all the assets of the company that would be subject to such a trust but only those that a Liquidator is under a duty under the Act to apply in accordance with its provisions. Thus, assets subject to security interests are usually outside the scope of such a trust because the Act does not prevent a secured creditor from enforcing his security against those assets. Second, if the assets are situated outside the BVI, difficult conflict of laws questions could arise if they are disposed of by the company after it goes into Liquidation, and in practice, the Liquidator may have to resort to the Courts of the place where they are situated in order to recover them, and would be subject to the conflict of laws rules applied by the foreign Court.

As regards the liquidation of a foreign company, the Act (and the Liquidator’s powers) are only in relation to its assets in the BVI²⁸⁵ and therefore the trust can only be in respect of BVI assets.

Another important question is the authority of the Liquidator to act in relation to assets situated abroad. Under the Insolvency Act he becomes the appropriate person to deal with the company’s assets in place of the directors, but the recognition of his authority abroad is really a matter for the foreign Courts there. The English Court, in common with the Courts in many other common law jurisdictions, will generally recognise a liquidator of a foreign company appointed by the Court of the place of incorporation. Such a liquidator will be recognised as having the authority to administer the assets of the company worldwide (and he could also seek the assistance of the English Court under s. 426 of the UK Insolvency Act 1986²⁸⁶).

The submitting of claims to the Liquidator is governed by the provisions of the Insolvency Act and they apply regardless of where the debt was incurred or what law it is governed by, and the Liquidator’s powers to reject claims is also governed by BVI law. However, whether there is a debt in the first place is a matter for the proper law of the debt; liquidation does not affect questions of whether the debt has been discharged or extinguished, which are governed by the proper law of the debt, but only affects the enforcement of those debts. Thus, if the debts owed to a creditor are discharged under its proper law after the company goes into liquidation but before payment of dividend, then the Liquidator can reject the claim because the debt ceases to be a provable claim²⁸⁷.

The provisions for pari passu distribution and set-off are mandatory and must be applied by a Liquidator in respect of any creditor who submits a claim in the liquidation²⁸⁸.

However, the netting of market contracts are effectively taken outside the scope of insolvency set-off and pari passu distribution under sections 434 and 435 of the Act, and these provisions are also mandatory: in the absence of fraud or misrepresentation there is no discretion in the Liquidator or the Court to disapply them, irrespective of where such contracts were entered into.

(d) Position of secured creditors The Insolvency Act expressly provides that liquidation does not affect the rights of secured creditors to enforce their security²⁸⁹. The right of enforcement would be governed by the proper law of the instrument that creates the security and the Insolvency Act does not add to those rights or detract from them. Certain jurisdictions may impose limitations on the rights of secured creditors to enforce their security in insolvency, unlike the BVI, and if the assets over which the security is granted are situated over there, questions can arise as to whether the secured creditor is subject to such limitations. Our view is that this is also a matter for the lex situs but with the following considerations: (a) the company cannot object to the enforcement because of the BVI Insolvency Act if the enforcement is in accordance with the agreement by which the security was granted; (b) if the company is not in any insolvency process in that foreign jurisdiction, it is questionable whether the limitations could apply in the first place.

As well as being in Liquidation in the BVI, the company may be in receivership abroad e.g. if a secured creditor has appointed a receiver in respect of the assets outside the BVI. The assets that are subject to such security (and over which a receiver has been appointed) will be outside the statutory trust of the company’s assets discussed above, and the costs and expenses applicable to the receivership will in general be payable out of the assets in the receivership²⁹⁰.

Whether such a receiver is also an Administrative Receiver under BVI law will depend upon whether his appointment satisfies the requirements of the Insolvency Act²⁹¹ i.e. that he was appointed by the holder of a floating charge over the whole or substantially the whole of the business and assets of the company, and he is a licensed insolvency practitioner under the Act i.e. an individual resident in the BVI holding a prescribed licence from the FSC. If these conditions are not satisfied, he will not have the status of an Administrative Receiver under BVI law (even though he will be a receiver under BVI law, and even though he may be an administrative receiver under the law of some other jurisdiction e.g. the UK).

If a BVI company has been wound up by a foreign Court, it can nevertheless be placed in liquidation in the BVI by either of the two routes available i.e. the appointment of a liquidator by the Court or by the members. A foreign company that is in liquidation abroad may also be placed in liquidation but only through the mechanism of a Court appointed liquidator.

In such situations, the liquidation of the company in its place of incorporation will generally be regarded as the primary liquidation and, in common law countries at least, all others will be treated as "ancillary" liquidation where the liquidator’s powers are confined to collecting in and distributing the assets in that jurisdiction²⁹².

If a BVI company is in liquidation abroad, that does not prevent it from entering into the other insolvency regimes available under the Insolvency Act i.e. Administration, Administrative Receivership or Creditors’ Arrangement. But even if it does enter into these regimes, that by itself will not negate the foreign liquidation of the company.

Part XIX of the Insolvency Act brings in a new regime for judicial assistance in insolvency proceedings. They allow the foreign representatives of certain types of insolvency proceedings (i.e. collective judicial or administrative proceedings in which the property and affairs of the debtor are subject to control or supervision by a foreign Court²⁹³ e.g. liquidations) taking place in designated territories can apply to the BVI Court for assistance. The representatives who can apply for such orders are persons authorised to administer the reorganisation or liquidation of the company’s property or affairs (e.g. liquidators), or who are authorised to act as representative of the foreign insolvency proceedings²⁹⁴. The provisions are modelled on section 426 of the UK Insolvency Act 1986, but with significant differences.

The BVI Court, when faced with such an application, do what will best ensure the economic and expeditious administration of the foreign principles to the extent that is consistent with certain guiding principles i.e. the just treatment of all persons claiming in the foreign proceedings; the protection of persons in the BVI who have claims against the company against prejudice and inconvenience in the processing of claims in the foreign proceedings; the prevention of preferential or fraudulent disposition of property; the need for distributions to claimants in the foreign proceedings to be substantially in accordance with the order of distributions in a BVI insolvency; and comity²⁹⁵.

The orders which the BVI Court can make in aid of the foreign proceedings are extremely wide and include the restraining of proceedings²⁹⁶; orders requiring a person to deliver up the property of the company to the foreign representative²⁹⁷; orders to facilitate the co-ordination of insolvency proceedings in the BVI with the foreign insolvency proceedings²⁹⁸; and authorising the foreign representative of any person who could be examined in BVI insolvency proceedings²⁹⁹.

However, secured creditors are protected for the Act specifically provides that such orders shall not affect the rights of secured creditors to take possession of and realise the property over which they have security³⁰⁰. It seems that the provisions are wide enough for the BVI Court not only to render merely procedural assistance but also to apply substantive principles of BVI insolvency law³⁰¹. The BVI Court has a discretion whether to apply the law of the BVI or the law applicable to the foreign proceedings³⁰². However, set-off and preferential creditors are protected from this provision in that the Court order also cannot affect the right of any creditor to benefit from the set-off provisions in Section 150 of the Act, or result in a preferential creditor receiving less than he would under a BVI insolvency, without the consent of such person³⁰³.

Part XVIII of the Act contains provisions based on the UNCITRAL Model Law on Cross-Border Insolvency for giving and seeking assistance in insolvency proceedings, but this Part will not be brought into force for the foreseeable future. In our view, it is unlikely ever to come into force.

Apart from the statutory provisions, a liquidator appointed under a foreign liquidation may apply to the BVI Court for relief on behalf of the company in liquidation and the BVI Court will recognise his title.

One issue that sometimes arises is whether a freezing injunction (formerly known as a Mareva injunction) could be obtained in the BVI in order to preserve assets (principally shares in BVI companies) of a company that is in insolvency proceedings abroad. The position is that if the injunction is sought by the company or its insolvency representative, the BVI Court can, in the exercise of its discretion, assist the foreign insolvency proceedings by granting such injunction e.g. in order to preserve the assets to be dealt with in accordance with the foreign insolvency proceedings³⁰⁴.

If an injunction is sought by a creditor of the company in order to preserve the assets in the BVI, the Court will consider the effect of such an order on the creditor and on the insolvency proceedings abroad. If the creditor is not prejudiced by participating in the insolvency proceedings abroad or is using the injunction to steal a march on other unsecured creditors by seeking to preserve assets in the BVI against which he can enforce any judgment, the Court may refuse an injunction³⁰⁵. If, however, a creditor would be prejudiced in having to participate in the foreign insolvency proceedings, then an injunction may be granted³⁰⁶. The purpose of such an injunction is to preserve the assets pending an ancillary liquidation of the company (or other insolvency process) for the benefit of creditors in the BVI.

Part VIII of the Insolvency Act contains a comprehensive code for reviewing certain types of vulnerable transactions entered into in the twilight period before the onset of insolvency. The code is largely based on the provisions of sections 238 – 245 of the UK Insolvency Act 1986 but with important differences and clarifications. The uncertainties thrown up by the UK legislation have been largely ironed out in the BVI legislation so to promote certainty of transaction, and provide greater certainty for companies and persons with whom they transact on the eve of insolvency, one the one hand, and for liquidators and administrators on the other.

In summary, the Act changes the law relating to preferences by moving away from the test of "intention" or "desire" to prefer; and new avoidance provisions are introduced for transactions at an undervalue, voidable floating charges and (probably of less importance in practice) extortionate credit transactions. Certain key concepts apply to these provisions such as an "insolvency transaction", "vulnerability period" and "connected person" which are discussed below.

The provisions are detailed and comprehensive and it is beyond the scope of this guide to analyse the minutia of the legislation in depth. Instead this guide will focus on some of the key features of the Act.

The broad purpose and effect of these provisions is straightforward: certain types of transactions are liable to be set aside in administration or liquidation if they were entered into by a company during the "vulnerability period" prior to it going into administration or liquidation, and they were "insolvency transactions" (i.e. if the company was insolvent at the time of the transaction or it was rendered insolvent by the transaction). Those types of transactions are unfair preferences, undervalue transactions, voidable floating charges, and extortionate credit transactions, and each one is discussed below. The vulnerable period and the burden of proof vary according to whether the transaction was with a "connected person" or not.

A transaction is an unfair preference if it is an insolvency transaction entered into by the company with a creditor within the vulnerability period, and the transaction has the effect of putting the creditor in a better position in the liquidation of the company than if the transaction had not been entered into³⁰⁷. However, there is an exception for transactions that take place in the ordinary course of business³⁰⁸.

This provision brings a change in BVI law away from the tests of "intention to prefer" or "desire to prefer" (as found in English law) to the test of effect of the transaction (as found in the law of Scotland, Australia and the US). It has the great merit of certainty for the effect of a transaction can readily be ascertained objectively, and the position is not muddied by consideration of nebulous concepts such as the intention or desire of the company. The test of desire to prefer found in English law, which is a subjective test and indeed is not the same as an intention to prefer³⁰⁹, is a much more difficult test to apply in practice and imposed difficult evidential burdens on liquidators and administrators because a company’s desires (which generally, but not always, equates to the desires of its office holders) are not readily ascertainable.

If the transaction is entered into with a creditor who is a connected person, then the vulnerability period is extended, and there is a rebuttable presumption that (1) the transaction was an insolvency transaction, and (2) the exception does not apply. The effect of this is to place the burden of proof on the creditor to show that it was not an insolvency transaction and that it was entered into in the ordinary course of business.

For a transaction to be an undervalue transaction it must be an insolvency transaction, entered into by the company during the vulnerability period, and must be (1) a gift by the company, or (2) a transaction where the company receives no consideration, or (3) where the value of the consideration, in money or money’s worth, received by the company is significantly less than the value of the consideration provided by the company in money or money’s worth³¹⁰.

This provision is identical to section 238 of the UK Insolvency Act 1986. In England, it has been held³¹¹ that the last provision involves a comparison between the value of the consideration obtained by the company for the transaction against the value of the consideration provided by the company. Both values have to be measurable in money or money’s worth and have to be considered from the company’s point of view. Thus, the creation of a security over the company’s assets was not a transaction at an undervalue. What constitutes consideration is a question of fact (which could involve a question of law as well e.g. the construction of a document)³¹², and where there are series of linked transactions it may be permissible to consider the overall position rather than the position under just one, isolated aspect of the transactions.

There is an exception to an undervalue transaction where the company enters into the transaction in good faith and for the purposes of its business and, at the time it entered into the transaction, there were reasonable grounds for believing that it would benefit the company³¹³.

As with unfair preferences, if the undervalue transaction is with a connected person the vulnerability period is extended and there is a rebuttable presumption that the transaction was an insolvency transaction and that the exception does not apply.

A floating charge created by the company created during the vulnerability period and which is an insolvency transaction is voidable except to the extent of new money advanced or new benefit given to the company (i.e. liability of the company discharged, or assets or services supplied to the company, on or after the creation of the charge)³¹⁴.

If the floating charge is given to a connected person, the vulnerability period is extended, and there is a rebuttable presumption that the transaction was an insolvency transaction³¹⁵.

An extortionate credit transaction is one entered into within the vulnerability period for the provision of credit to the company and which requires grossly exorbitant payments to be made or otherwise grossly contravenes the ordinary principles of fair trading.

For a transaction to be voidable under Part VIII, it must be an "insolvency transaction" which is defined for these purposes as a transaction that is entered into at a time when the company is insolvent or the transaction causes the company to become insolvent.

Insolvent for these purposes has a confined meaning for it specifically does not include balance sheet insolvency utilised in other provisions of the Act and to all intents and purposes means cash flow insolvent.

This is an important feature of the law designed to promote certainty because a person dealing with a company (and indeed the company itself) is more likely to know whether the company is paying its debts as they fall due than the state of its balance sheet.

The class of connected persons is extremely wide and includes the promoter of a company, the director or member of a company or a related company, a related company, a company with common directors, a partner, a nominee or relation of a connected person, and certain trustees and beneficiaries.

The definition of related companies includes subsidiaries, holding companies, companies under common control and sister companies. A director includes both a "shadow director" as well as a de facto director.

The definition of vulnerability periods is technical. For unfair preferences, undervalue transactions and voidable floating charges, the period commences 6 months prior to the "onset of insolvency" (discussed below) and ends with the appointment of an administrator or liquidator. However, for connected person, the vulnerability period is extended and commences 2 years prior to the onset of insolvency.

For extortionate credit transactions, the vulnerability period commences 5 years prior to the onset of insolvency

The onset of insolvency has specific statutory meanings: it means the date when an application is filed for the appointment of a liquidator (where the company goes into liquidation) or for an administration order (where the company goes into administration). If liquidation immediately follows on from administration, it is the date when the application for an administration order was filed, and where a liquidator is appointed by members it is the date of such appointment.

If a transaction is found to be a voidable transaction, the Court has extremely wide powers under s.249. It could set aside the transaction or, in respect of unfair preferences and undervalue transactions, make such order as it thinks fit for restoring the position to what it would have been if the company had not entered into the transaction. Such an order could include the revesting of assets to the company³¹⁶.

The Court’s powers are not just restricted to the person who entered into the voidable transaction with the company, but it can also make orders against third parties although as regards unfair preferences and undervalue transactions such orders shall not prejudice any interest acquired by those third parties in good faith and for value³¹⁷, and they are further protected with a rebuttable presumption of acting in good faith³¹⁸. However, the presumption does not apply if the person had notice of the fact that the transaction was an unfair preference or undervalue transaction, or he was a connected person, or he had notice of the filing of an application for administration or liquidation³¹⁹.

The Court has a discretion to make an order as it thinks fit – an applicant is not entitled to demand any particular form of order, and indeed the Court may decline to make an order altogether in the exercise of its discretion³²⁰.

(b) Effect on transactions entered into before the provisions came into force It is intended that a regulation will govern the effect of these provisions on transactions entered into before the Act comes into force, and you should check with us to confirm the current position.

Part VIII applies to BVI companies as well as foreign companies over which the BVI Court has appointed liquidators but only applies in the administration of BVI companies. Part VIII is also likely to have extraterritorial effect in that a transaction may be vulnerable under Part VIII irrespective of what part of the world it was entered into, and the BVI Court could make an order against a person who is outside the jurisdiction³²¹.

Provisions in Market Contracts remain legally enforceable notwithstanding Part VII of the Act322. This would be in line with the policy of the UK legislation which provides that where market contracts are concerned the Courts will not make any orders in respect of preference and transactions at an undervalue³²³ (see separate guide on Set-off, Netting and Market Contracts).

One of the important clarifications which the Act provides is that any recoveries made by a liquidator or administrator under these provisions are deemed to be assets of the company available to pay unsecured creditors of the company³²⁴. This avoids the uncertainty that existed in English law where a similar statutory provision was not in the UK Insolvency Act and which required case law to establish that any recoveries made a liquidator enured for the benefit of unsecured creditors and not secured creditors because the right to commence proceedings for preferences and transactions at an undervalue were not the property of the company at the commencement of the liquidation³²⁵.

One consequence of the English decisions i.e. that the right of action and the recoveries made not forming part of the assets of the company at the time of liquidation, is that the costs and expenses of liquidation cannot be paid out of those recoveries³²⁶.

However, under the BVI legislation the recoveries are deemed to be "assets of the company". This has important consequences on the costs and expenses of a liquidator. Under English law, the position is that such recoveries are not assets of the company (because the company did not have a right of action in relation to these before liquidation) and therefore any action by a liquidator in pursuing such transactions is not an action to recover assets of the company. The result is that a liquidator in England cannot deduct the costs and expenses of such action from the assets in his hands. By contrast, BVI would appear to reverse that position by providing that the recoveries are assets of the company, and thereby allowing liquidators and administrators to deduct their costs and expenses from assets in their hands.

The practical consequence of this is that such actions are more likely to be pursued by liquidators and administrators in the BVI than in the UK.