20 July 2020

Statutory demands in the BVI: no longer truly optional?

Statutory demands in the British Virgin Islands have long been a useful option for creditors of defaulting companies. Properly utilised, they either secure payment of the outstanding debt or provide the creditor with the benefit of a statutory presumption of insolvency to assist in their application to appoint a liquidator over the company.

However, in the light of the recent decisions in Rangecroft Ltd v Lenox International Holdings Ltd [1] and IS Investment Fund Segregated Portfolio Company v Fair Cheerful Ltd [2] a reassessment is required as to whether the procedure is truly optional.

The Court in Lenox International highlighted the importance of following the "two-step process" to wind up a company on the basis of its insolvency. In its view, the creditor should first serve a statutory demand before then issuing an application for the appointment of a liquidator. Although the Court recognised that a creditor is not obliged to serve a statutory demand, it went on to make it clear that the Court did not encourage proceeding without a statutory demand and asked whether there was a "good reason" for "failing" to serve a statutory demand. The underlying rationale was informed by a desire to prevent the debtor from being prejudiced by the creditor's failure to serve a statute demand in the context of an arbitration clause of disputed effect. In the Court's view, the "two-step process" provided an important safeguard for the company.

This marks a shift in approach and language which was also echoed in Fair Cheerful. In circumstances where a creditor may be called to upon to explain its "failure" to serve a statutory demand, it is arguable that the procedure is no longer truly optional in the traditional sense. Rather, the reasoning in Lenox International and Fair Cheerful suggests that the statutory demand route should be regarded as the default position and sounds a note of caution that a creditor will be required to justify electing to proceed directly to an application to appoint a liquidator without first serving a statutory demand.

This will be unwelcome news to creditors who previously would often proceed directly to an application to appoint a liquidator. It is likely to result in an increased use of the statutory demand procedure and, as a result, more disputes coming before the BVI Court by way of application to set aside a statutory demand, as opposed to at the stage of a contested application to appoint a liquidator.

For more information or for a copy of the Court's decisions, please feel free to contact the authors using the details displayed.

 

[1] BVIHC (COM) No 37 of 2020, unreported, 6 July 2020

[2] BVIHC (COM) 2020/0034, unreported, 16 July 2020

Our people