In December 2018, the BVI Commercial Court appointed 'soft touch' provisional liquidators to Constellation Overseas Ltd, a BVI incorporated company, and five of its BVI incorporated subsidiaries (the Companies').2 Although the practice of appointing provisional liquidators to facilitate cross-border restructuring is well established elsewhere, this was the first occasion on which the BVI Court had made such an Order.3
Prior to the Constellation decision, there had been a respectable body of practitioner opinion which held that the unique features of the BVI Insolvency Act 2003 (the 'BVI Act') excluded any jurisdiction to appoint provisional liquidators in such circumstances. Although the question as to the existence of the jurisdiction may have been answered in the Constellation decision, questions remain as to the limits of that jurisdiction and the circumstances in which the Court will consider it appropriate to exercise its discretion in favour of an appointment where the purpose is a restructuring. This article seeks to explore these questions and to propose answers to at least some of them.
As a starting point, we look at the factual background against which the applications in Constellation were made and the procedural factors material to the Court's decision in that case. Against that factual background, we then turn to the legal framework within which the Court reached its decision in Constellation and seek to highlight how the Court dealt with certain legal points which arose in the case and which may arise in future cases on different facts. Lastly, we tentatively suggest some general conclusions which may be drawn from the case.
The Companies were members of a group of companies (the 'Group') which had its operational headquarters in Brazil and which, together, carried on the business of offshore drilling for the oil and gas industry. Importantly, at the time of the BVI applications, the Group, and each of the Companies, was already the subject of a Brazilian Judicial Reorganisation ('RJ') the object of which was to facilitate the agreement and implementation of a plan for restructuring the Group's debt. Each of the Companies continued to operate its business under the supervision of the First Business Court of Rio de Janeiro ('the Brazilian Court'). The Companies considered, and submitted to the BVI Court, that Brazil was the proper forum for its restructuring. Certain companies within the Group, including the Companies had also commenced proceedings in the US for protection under Chapter 15 of the US Bankruptcy Code seeking the recognition of the RJ as the 'foreign main proceeding' of each of the Chapter 15 Debtors. Accordingly, the Companies' approach to the BVI Court was as ancillary support to the main proceeding in Brazil, facilitated by proceedings in other jurisdictions.
The BVI Court's statutory jurisdiction to appoint a provisional liquidator arises only where an application for the appointment of a liquidator (called, for convenience in this Article, a 'petition') has been filed but not yet determined or withdrawn.4 In Constellation, each of the six Companies had filed its own petition with the BVI Court seeking the appointment of liquidators on the grounds of insolvency.5 The nature of the proceedings was therefore domestic: involving applications by BVI companies in which the BVI Court was invited to exercise a jurisdiction conferred upon it by a BVI statute within the context of pending BVI winding up proceedings in respect of those BVI incorporated companies.
The orders sought from the BVI Court had as their purpose the facilitation of the restructuring of the Companies' debts while they continued to operate as a going concern. The Companies' applications for the appointment of the provisional liquidators were supported by creditors holding over US$1billion of the companies debts of US$1.5 billion. The support of a 50% majority of creditors was required to secure the success of the RJ. Accordingly, the Court was able to be satisfied that the restructuring enjoyed reasonable prospects of success.
The Court was also satisfied on the evidence put before it that, whilst the Companies were balance sheet solvent, in the absence of a restructuring, they had insufficient cash to meet forthcoming financial debt obligations and that default on those obligations would trigger additional defaults as a result of cross-default provisions in other financial instruments to which the Companies were party.
In addition, the evidence showed that the realisation of the Group's assets on a going concern basis was significantly better than on a breakup basis. Accordingly, the Court was satisfied that the appointment of the provisional liquidators to the Companies for the purpose proposed, namely maintaining the going concern value whilst facilitating a restructuring, was liable to maintain the value of the assets for the benefit of their creditors as a whole and, accordingly, that its discretion to make such an appointment was engaged.
As part of the RJ process, proceedings and the enforcement of claims against debtors, including the Companies, had been stayed by the Brazilian Court. Similarly, in the Chapter 15 proceedings, the Companies' objective was to obtain a stay barring the commencement or continuation of actions against them or their assets. The BVI Act provides for a moratorium on enforcement by creditors only after the point at which the Court makes an order for the company to be wound-up and there is no provision in the BVI Act to protect the company against execution by creditors between the date on which a winding up petition is filed and the date of the winding up order. This means that the appointment of provisional liquidators does not, without more, prevent creditors from executing against the company. However, the BVI Court does have power to stay or restrain Court proceedings pending before the BVI Courts or on appeal from those Courts.6 Although the Companies were aware of only one, non-material claim, pending in the BVI, on Constellation the Court was invited to, and did, make an order staying such proceedings.
We now turn to the legal framework within which the Court reached its decision in Constellation.
1. Rosalind Nicholson and Rhonda Brown (Associate) represented Banco Bradesco S.A, the Group's largest unsecured creditor, at the hearing of the Companies' applications.
2. Re Constellation Overseas Ltd, Lone Stare Offshore Ltd, Gold Star Equities Ltd, Olinda Star Ltd, Snover International Inc and Alpha Star Equities Ltd BVIHC (COM) 2018/ 0206, 0207, 0208, 02010 and 0212 referred to together as 'Constellation'.
3. There had been an unreported case in which the BVI Court had declined to make such an appointment – Re Transfield ER Cape Limited BVIHC(COM) 2010/121 (unreported) – further discussed below.
4. S.170(1) of the BVI Act.
5. Under s.162(1)(a) of the BVI Act.
Originally published in International Corporate Rescue, Volume 16, Issue 4.
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.