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Industry Updates

Redeeming Investors and Assignees

30 Aug 2012

The Eastern Caribbean Court of Appeal recently considered in Spectrum Galaxy Fund Ltd v Xena Investments Ltd, whether British Virgin Islands ("BVI") law permits a redeemed shareholder to participate in a company liquidation process.  The question which arose for determination by the Court of Appeal was whether an assignee of redemption proceeds (as opposed to the original redeemed but unpaid member) had standing to petition for the winding up of the fund.

The Background

An investor in Spectrum had given notice of its intention to redeem all its shares in the fund.  As a result of the global economic crisis, a forbearance agreement was entered into for two years.  During that two year period the investor assigned its rights to Xena, and on the expiry of the two year period, Xena applied to the BVI Courts to wind up the fund. 

At the time the application was made, the law in the BVI was that a redeemed but unpaid investor had standing to apply as a creditor for the appointment of liquidators, and the winding up order was duly made.

Nearly a year later, the Court of Appeal held in a different case, Westford Special Situations Fund Ltd v Barfield Nominees Ltd and Ors, that an unpaid redeemed shareholder did not have standing to seek the appointment of a liquidator, on the basis that the BVI Insolvency Act provides that claims made by a member or former member in his capacity as a member are not admissible claims in a liquidation, and therefore do not give standing to apply for a winding up.

Spectrum accordingly sought the discharge of the winding up order at first instance and at the same time appealed the order to the Court of Appeal.

The Decision

The Court, at first instance, refused to discharge the order but the appeal was successful.  The sole question that arose on the appeal was whether Xena – as an assignee of the redemption proceeds and therefore never having been a member of Spectrum - was in a better position than the original investor to seek a winding up order, thereby enabling it to escape from the consequences of the decision in Westford. 

Spectrum argued that Xena could obtain no better title or interest than its assignor, and that public policy considerations should in any event prevent a simple assignment being used to circumvent the provisions of the Insolvency Act as interpreted in Westford.

The Court of Appeal didn't like either argument, preferring to look at the question from the perspective of what is and what is not an admissible claim in a liquidation.  Xena argued that two cumulative requirements were necessary before a claim could be precluded: first, the person making the claim had to be a member or past member of the fund, and secondly, the person had to be making the claim in his character as a member.  Since Xena fulfilled neither requirement, it had an admissible claim, and was therefore a creditor with standing to seek the appointment of liquidators.

The Court of Appeal disagreed, holding that the Insolvency Act was merely describing the characteristics of the claim, not the characteristics of the claimant.  The assignment of a non-admissible claim could not convert it into an admissible one.

Xena is seeking permission to appeal to the Privy Council.