Vol 9 (2012) - Issue 2

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BVI Update on Current Trends in Insolvency Law and Practice

It has been an interesting twelve months in the British Virgin Islands! We have seen a number of decisions of both the BVI Commercial Court and Court of Appeal that may have set BVI Insolvency Law and Practice on a course all of its own in that the conclusions reached have been very different to those reached in other jurisdictions on the same or very similar issues.
There have been conflicting decisions on similar issues in the BVI and Cayman Islands court which suggest that the two jurisdictions take a very different approach to what, in all the circumstances, the business of the particular fund is when dealing with an application to wind up the fund on the just and equitable basis.
The BVI Court has refused to accept that the inclusion of a typically unrestrictive objects clause in a fund’s memorandum and articles could effectively defeat a shareholder seeking the fund’s liquidation on the just and equitable basis. The Cayman Court, on the other hand, has taken a somewhat different approach. In Re Quantek Opportunity Fund, Ltd (15 December 2010, unreported, Bannister J), the BVI Court considered whether it was just and equitable to appoint a liquidator to Quantek, an open ended feeder fund that had indefinitely suspended the redemption of its shares and was in run off.
In his judgment, Bannister J had cause to consider the circumstances in which it would become practically impossible for an open ended corporate mutual fund to carry on the business for which it was promoted.
This was an issue that had already been considered by Jones J, sitting in the Financial Services Division of the Grand Court of the Cayman Islands, in a case that he decided earlier that same year. In Re Belmont Asset Based Lending Ltd (21 January 2010, unreported) Jones J also had to consider the circumstances in which it would become practically impossible for an open ended corporate mutual fund to carry on the business for which it was promoted. Having considered the established English law principles set out above, the Jones J held that: 'it can be said that it is just and equitable to make a winding up order in respect of an open ended corporate mutual fund if the circumstances are such that it has become impracticable, if not actually impossible, to carry on its investment business … If such a company, organized as an open ended mutual fund, has ceased to be viable for whatever reason, the Court will draw the inference that it is just and equitable for a winding up order to be made.'
This 'viability' test was subsequently applied by the Grand Court in Re Freerider Ltd (27 April 2010, unreported, Foster J) and Re Wyser-Pratte Eurovale Fund, Ltd (9 September 2010, unreported, Jones J) before being considered by the BVI High Court.
Bannister J observed that Jones J had confined his reasoning in Belmont to the position of open ended investment funds. He too considered the established English authorities but then rejected the viability test holding that the loss of substratum principles applied in those authorities should be of equal application to any type of company. Accordingly Quantek would not be put into liquidation unless the Court was satisfied that Quantek had reached the limit of its possible existence and it was impossible for Quantek’s to carry on its business.
In opposing the winding up it was argued on behalf of the company that, since Quantek had a ‘modern’ objects clause whereby it was permitted to do anything provided the activity it engaged in was not illegal, it continued to carry on its business as long as it did something. On that basis, it was argued, Quantek’s substratum could never be lost. Bannister J rejected this approach on the basis that the courts had never been confined to considering a company’s objects clause when enquiring into the nature of its business.
Where a company had no meaningful objects clause then it would be necessary to look elsewhere to establish the nature of its business. From its memorandum and articles and its PPM it was clear that Quantek’s business was that of an open ended feeder fund with particular investment objectives, which held investments in a master fund. On the basis that Quantek had ceased to be able to satisfy the requests for voluntary redemptions submitted by its shareholders, it had ceased to carry on the business of a feeder fund. Bannister J rejected this argument and held that a suspension of redemptions, even an indefinite suspension, did not mean that it was impossible for Quantek to carry on its business as a feeder fund, even whilst it was in run off.