There has been a significant increase in the number of lenders enforcing against secured assets in the BVI, which has entailed an uptick in the appointment of out-of-court receivers. This guide highlights the types of disputes arising out of such appointments.
As many offshore companies operate as holding vehicles, security is often granted by way of share mortgage. The BVI Business Companies Act 2004 (BCA), provides a mortgagee with security over shares in a BVI company a statutory right to appoint receivers over those shares. That right is typically mirrored in the underlying security instrument.
The process for appointing receivers in the BVI is set out in the Insolvency Act 2003 (Insolvency Act).
Once appointed, out-of-court receivers act as agent for the mortgagor unless the instrument pursuant to which they are appointed provides otherwise. While receivers are generally personally liable for their actions, this agency affords them a degree of protection as they act in the name of and on behalf of the mortgagor.
BVI legislation is relatively light-touch on the powers granted to a receiver, generally deferring to what has been agreed and set out within the instrument pursuant to which the receiver is appointed. In the case of security over shares, the receiver will generally have the power to (1) sell the shares, (2) vote the shares, and (3) take such other steps as they consider necessary or desirable to protect, improve or realise the shares.
According to the Insolvency Act, receivers are subject to a primary duty to exercise their powers (1) in good faith and for a proper purpose and (2) in a way they believe (on reasonable grounds) to be in the best interests of the person on whose behalf they are appointed. To the extent consistent with these primary duties, a receiver has a secondary duty to have reasonable regard to the interests of certain interested parties, such as creditors and those with an interest in any equity of redemption.
As the number of receiverships increase, so does the range of issues being disputed by mortgagors, often seeking to prevent appointed receivers from exercising their powers. The following trends are beginning to emerge:
1. Challenges to appointment
A mortgagor seeking to resist having their security enforced will often start by challenging the validity of the receiver's appointment by reference to the security documents. The relevant documents must have been properly executed and valid, the right to appoint receivers must have accrued (usually contingent upon an event of default) and the necessary processes carried out to notify the mortgagor of the default and give effect to the receiver's appointment.
2. Extent to which the Insolvency Act applies to receiverships over shares in BVI companies owned by an individual or entity located elsewhere
The Insolvency Act has an entire part governing the appointment of receivers. However, there is ambiguity as to whether several key provisions, such as those setting out the duties of a receiver, apply to all receivers appointed in relation to assets in the BVI.
Various provisions apply specifically to a receiver of a 'company', a company being defined as a company in respect of whose assets a receiver is appointed, unless the context requires otherwise. The overarching definition of a 'company' in the Insolvency Act is restricted to BVI registered companies. Arguably, therefore, where a receiver is appointed over shares in a BVI company, but not the assets of a BVI company, these provisions do not apply.
This ambiguity can lead to disagreements over what steps should or should not be taken by receivers and provides fertile grounds for legal disputes.
3. Balancing duties
The tripartite nature of receiverships (between mortgagee, mortgagor and receiver) has given rise to extensive authority on how receivers ought to balance the various duties that arise. But there is no one-size-fits all solution: a receiver must evaluate the competing interests ...