Insolvency law in the British Virgin Islands (BVI) is almost entirely codified in the Insolvency Act 2003 and supplemented by the Insolvency Rule 2005. The Act was modelled largely on the United Kingdom's Insolvency Act 1986, but with a number of key differences. The following guidance is a summary only.

  1. Under BVI law a company will be deemed to be insolvent if it cash-flow insolvent, balance sheet insolvent or "technically" insolvent (ie it has failed to satisfy a judgment debt or statutory demand letter). Insolvency on any of these bases will enable a creditor to petition the court for the appointment of a liquidator, and may also have other consequences (for example, when a company is insolvent, directors owe their duties to the company's creditors and not its shareholders). A company can also voluntarily appoint a liquidator by passing a qualifying members' resolution.
  2. Liquidation is a class right under BVI law, and any petition must be advertised so that members of the class are given notice and may support or oppose the making of an order. If a liquidator is appointed, then the liquidator's primary duty is to collect in all of the company's assets and then distribute them pari pasu to the company's creditors, and the legislation confers upon the liquidator wide powers to enable him to do so.
  3. Once a liquidator is appointed, unsecured creditors cannot commence legal proceedings against the company without leave, and any rights of action against the company are converted into claims in the liquidation process. Secured creditors generally do not participate in the liquidation process, and may continue to proceed with any enforcement action directly against their collateral pursuant to a valid security interest. A liquidator has a right to disclaim onerous property and unprofitable contracts (but this cannot remove third party rights once they have vested). BVI law only provides for a very small class of preferential creditors, and these are rarely commercially significant in insolvent liquidations. Liquidation commences on the making of an order, and does not "relate back" to the time of the petition.
  4. When a company goes into insolvent liquidation, any mutual debts between the company and a creditor intending to prove in the liquidation will be set-off. However, the right of set-off is not mandatory, and can be waived by a creditor provided this does not prejudice other creditors. Any creditor who extended credit to the company at a time when it had notice of the company's insolvency (excluding balance sheet insolvency) cannot set-off. The Insolvency Act has incorporated ISDA Model Netting legislation (pre-2007 form) and so any contractual netting provisions relating to financial contracts will prevail over the statutory insolvency set-off provisions.
  5. A liquidator may challenge transactions entered into in the twilight period prior to insolvency where such transactions constitute either an unfair preference, undervalue transaction, voidable floating charge or extortionate credit transaction. In each case (except for extortionate credit transactions) the company must have been insolvent (excluding balance sheet insolvency) at the relevant time, or the transaction caused it to become insolvent. The relevant vulnerability period is two years for connected persons, or six months in all other cases. In each case, the statute contains relevant "safe harbours" to protect bona fide arm's length transactions. Under BVI law it is not necessary to demonstrate an "intention to prefer" to challenge a transaction as an unfair preference.
  6. A liquidator can also pursue former directors (including shadow or de facto directors) and officers of the company for either misfeasance or insolvent trading. If the directors knew or ought to have concluded that a company could not avoid insolvent liquidation then the directors will be liable except to the extent they took every step reasonably open to them to minimise loss to creditors. A liquidator can also pursue any person involved where the company has been engaged in fraudulent trading.
  7. The Insolvency Act also regulates receiverships, including administrative receiverships. Under BVI law it is possible to appoint an administrative receiver pursuant to a floating charge over all or substantially all of a company's assets and undertaking.
  8. Although the Insolvency Act also makes provision for administration orders, these provisions have not yet been brought into force. There has been recent talk about potentially bringing them into force (the Government's earlier position had been that they would never be brought into force), and it is unclear at this time what decision is likely to be taken. The provisions in the BVI do differ in some key respects from the English legislation that they were modelled on. Administration orders may be blocked by the holder of a floating charge. An administration order creates a moratorium on enforcing claims against the company, including secured creditor's claims.
  9. It is also possible for an insolvent company to enter into a creditor's arrangement under a supervisor, and thereby restructure the company's debts. Such arrangements cannot affect the rights of secured creditors or preferential creditors without their consent. Such arrangements have not yet proved popular in the BVI.
  10. The Insolvency Act also has two parts dealing with cross-border issues. Part 18 sets out the UNCITRAL model law on cross-border insolvency, and this has not been brought into force. Part 19 deals with orders in aid of foreign proceedings, and broadly provides for the cooperation of the BVI court in a foreign liquidation. Part 19 contains an express qualification that assistance cannot be rendered in such a way as to interfere with the rights of a secured creditor under their security.
  11. In order to act as a liquidator in an insolvent liquidation, administrative receiver (but not a simple receiver), supervisor of an arrangement or administrator (if administration is ever brought into force) a person must be a licensed insolvency practitioner. A practitioner must be resident in the British Virgin Islands to obtain a licence. However, it is possible for a foreign insolvency practitioner to be appointed jointly with the BVI resident licensed insolvency practitioner.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.