When is a company insolvent – to appoint or not to appoint a liquidator in the BVI?

In the recent decision of China Minsheng Banking Corp., Ltd., Hong Kong Branch v Tai Feng Investments Limited, the BVI Commercial Court gives helpful guidance on its power to appoint liquidators. In this instance, China Minsheng Banking Corp., Ltd. (Bank) sought the appointment of liquidators over Tai Feng Investments Limited (Company), a company incorporated in the BVI, following its failure to satisfy a statutory demand. The Company opposed the appointment of liquidators on a number of grounds, the key ones of general application being: (1) the Company was not insolvent irrespective of its failure to satisfy or set aside a statutory demand; (2) the Bank had failed to effect proper service of the statutory demand in accordance with the Insolvency Rules; and (3) the Company disputed the debt on substantial grounds.

Insolvency

Pursuant to the BVI Insolvency Act 2003¹, a company is deemed to be insolvent if it fails to comply with a statutory demand that has not been set aside. In this case, the Company asserted that it had security over property worth in excess of the debt claimed and hence would have been entitled to an order setting aside the statutory demand under the Insolvency Act² and that it was solvent when applying a balance sheet test. It argued that, as a consequence, a liquidator should not be appointed on the ground of insolvency based on a failure to satisfy or set aside a statutory demand.

Whilst, on the facts of the case, the Court determined that the Company had not met the burden of proof as to its solvency, the Court importantly held that even if it is assumed that a company is solvent on the basis of a balance sheet test, it is still insolvent within the meaning of the Insolvency Act if it fails to pay a debt that is not disputed on substantial grounds. The Insolvency Act provides that a company is insolvent if it is proved to the satisfaction of the Court that it is unable to pay its debts as they fall due³. That would include the position where a company fails or refuses to pay a debt that is not disputed on substantial grounds with the Judge stating: “An application to appoint liquidators of a solvent company can succeed if the company is unable or refuses to pay its debts as they fall due”. The Court also helpfully reiterated that just because a company does not apply to set aside a statutory demand, this does not prevent it from adducing evidence at the petition stage as to solvency. So, where there is no substantial dispute and a statutory demand remains in being, a company can argue the position, but cannot rely on being rescued from an appointment of liquidators even if it is balance sheet solvent.

Service

It was undisputed that the statutory demand was properly served at the Company’s registered office. The complaint lay in the delay in the demand coming to the attention of the director of the Company. Not unsurprisingly, the Court held that this did not in any way affect the validity of the service although it could go to the manner in which the Court may operate its discretion in whether to appoint a liquidator or not.

Dispute on substantial grounds

The Company relied on the existence of an oral agreement by which the Bank had allegedly released the Company from its obligation to make payment to the Bank. Whilst this will be a matter of fact in each case, it was accepted that to succeed in its argument, the Company has to establish that the debt was disputed on substantial grounds. Was the averment of an oral agreement substantial enough? In this case, the Court held it was not, holding “where such an allegation is made, especially where there is written evidence to the contrary, the debtor faces an uphill task to satisfy the Court that there is a genuine or substantial dispute regarding the repayment of the debt.”

The issues raised in this case are not uncommon where a company finds itself facing an application to appoint liquidators or indeed where it applies to set aside a statutory demand. The decision of the Court and clear reasoning is therefore very helpful. With a show of speed, the Court also declined to allow an adjournment on the facts of the case, making an appointment of liquidators in just over two months.

[1] Section 8(1)(a)
[2] Section 157(1)(c)
[3] Section 8(1)(c)(ii)