Insolvency 2019 Second Edition

Last Updated November 22, 2019

Turks & Caicos

Law and Practice

Authors



Griffiths & Partners (G&P) is a leading, full service commercial law firm of attorneys based in the Turks and Caicos Islands (TCI). The firm advises international clients, law firms and intermediaries in a broad field of disciplines, including corporate (including economic substance), banking, finance and regulatory, litigation (including dispute resolution, insolvency and restructurings), real estate, and trust and private wealth. The firm is part of G&P Group, one of the largest professional service teams in the TCI, offering legal, trust (via Coriats Trust Company) and company management and formation services (via G&P Corporate Services). G&P is regularly involved in the highest profile legal and business work in the TCI. The attorneys are internationally qualified and admitted to practice in the TCI. The firm would like to extend thanks to Ryan Blain, partner at WB Financial Group, and also to Daria Klimenko, paralegal at G&P, for their valuable contributions to this chapter. Ryan is a CPA and has over 15 years of professional accounting and management experience. Daria graduated from the University of Cambridge with a Masters degree in commercial law specialising in corporate finance, competition law and international commercial litigation, and has recently been providing assistance and support in several ongoing insolvency and restructuring matters in which G&P is acting.

The Turks and Caicos Islands (TCI) is a British Overseas Territory which uses the US dollar as currency, with a favourable regime for foreign investment. The domestic economy enjoys one of the fastest growth rates in the Caribbean, and TCI enjoys a stable and strong Government, underpinned by the rule of law, with the ultimate Court of Appeal being the Privy Council in London. This legal, constitutional and financial stability is reflected in annual growth rates of more than 5% since 2013, and a credit rating of BBB+. With approximately 15,800 corporates registered in the TCI, many of these carry on business within the jurisdiction.

The economy is largely reliant on the North American tourism market, which (together with high end real estate development) accounts for over 70% of TCI’s GDP. Efforts are being made to diversify the economy by growing the financial services sector. There is a well-established Financial Services Commission (the FSC) which oversees all regulatory aspects of the TCI financial services industry and plays an active role in insolvency proceedings, particularly in relation to its approximately 120 active licensee companies in the domestic financial services sector.

The TCI regulatory framework is rapidly developing to meet the expectations of market participants. Recent developments in, and overhaul of, the companies and insolvency legislative regimes (which essentially now mirror the British Virgin Islands’ (BVI) legislation) brought about by the introduction of new legislation are live examples of the efforts made within the jurisdiction to streamline the processes and provide for greater stability, certainty and comprehensive protection of the rights and interests of various parties, including shareholders, creditors and other stakeholders operating in and from the TCI.

There is therefore no precise empirical data relating to the volume and velocity of financial restructurings and insolvencies taking place in TCI and so it is difficult to draw any firm conclusions as to the preferences of market participants vis-à-vis any particular procedure. Sophisticated informal and statutory arrangements are not typical in the TCI given the size of the jurisdiction and the financial services market.

There has been a major reform in the regulation of the restructuring and insolvency market in TCI with the enactment of the Insolvency Ordinance 2017 (IO), which came into effect on 1 January 2019, and accompanying Insolvency Rules 2019, Insolvency Practitioners Regulations 2019, Insolvency Practitioners Code 2019 and Insolvency (Transitional Provisions) Regulations 2019 all of which came into force on 1 April 2019 (collectively, the Insolvency Regime). The Insolvency Regime is largely based on equivalent and successful BVI insolvency legislation. Whilst there is no meaningful empirical data on the application of the Insolvency Regime in practice to date, the change was welcomed by market participants and private practitioners and is widely regarded as positive, particularly as it should facilitate a more orderly operation of the insolvency market.

A key change brought about by the Insolvency Regime is the introduction of a compulsory licensing regime for insolvency practitioners (IPs). The FSC has already approved licensing of IPs based and practicing in the TCI, and we anticipate more licenses being issued in the near future.

The principal piece of legislation governing restructurings, reorganisations and voluntary liquidation proceedings is the Companies Ordinance 2017 and accompanying Companies Regulations (CO).

Insolvency proceedings are described in the IO and the accompanying secondary legislation (see 1.2 Changes to the Restructuring and Insolvency Market)

The CO and Insolvency Regime provides for the following:

  • company arrangement;
  • administration;
  • receivership;
  • liquidation;
  • plan of arrangement; and
  • scheme of arrangement.

Plan of Arrangement (CO, Part XII)

A plan of arrangement, instigated by the directors or a voluntary liquidator, may involve any of the following:

  • an amendment to the articles;
  • a reorganisation or reconstruction of the company;
  • a merger or consolidation;
  • a separation of two or more businesses carried on by the company;
  • any sale, transfer, exchange or other disposition of the assets or business of the company;
  • any sale, transfer, exchange or other disposition of shares, debt obligations or other securities in the company; or
  • a dissolution of the company.

An application must be made to the court following approval of the plan of arrangement by the directors. The court may approve or reject the plan of arrangement, or make such changes as it considers necessary. Further, the court may determine whether any holder of shares, debt obligations or other securities in the company, may dissent from the proposed arrangement and receive payment of the fair value of any of the foregoing securities.

Upon approval from the court and in accordance with the court order, the directors must execute the articles of arrangement which must then be filed for registration.

Scheme of Arrangement (CO, Part XII)

A scheme of arrangement is a compromise/arrangement between the company and its creditors or members, or any particular class of them.

A scheme of arrangement is a two-step process. First, a company files an application to the court setting out the proposed scheme and the court orders a meeting of creditors/members. A scheme of arrangement requires approval by a majority representing 75% or more in value of the creditors or members (or a particular class of them). Where the plan is approved by creditors, the company must request the court to sanction the scheme which then becomes binding on all of the creditors/members of the company affected by the scheme.

In the case of a company in voluntary liquidation, it is binding on the liquidator and any persons liable to contribute to the company’s assets in the event of liquidation. The court order, however, only becomes effective upon a copy of the same being filed with the Registrar of Companies (Registrar).

Company Arrangement (IO, Part III)

A company arrangement is similar to a plan of arrangement, see above, except that it does not require court supervision. Instead, the appointed interim supervisor prepares a written report on the proposal and calls a meeting of creditors for the proposal to be voted on. 

The directors, the administrator if the company is in administration, or the liquidator if it is in liquidation, may propose a company arrangement.

Voluntary Liquidation (CO, Part XV)

A voluntary liquidation procedure is only available to a company that either has no liabilities, or that is able to pay its debts as they fall due and the value of its assets equals or exceeds its liabilities. The directors must make a declaration of solvency to this effect and approve a liquidation plan, inter alia, specifying the reasons for the liquidation and the proposed timeframe. The business of the company in voluntary liquidation, in any event, cannot be carried on for more than two years without the permission of the court.

A voluntary liquidator cannot be appointed where the company is already in administration or liquidation or pending the decision of the court on an application for the appointment of an administrator or liquidator, in which case the resolution to appoint a voluntary liquidator is void and of no effect.

If at any point during voluntary liquidation the voluntary liquidator forms a view that the company is insolvent, he must notify the Official Assignee (see 9.1 Types of Statutory Officers) and call a meeting of creditors within 21 days of such notice. The liquidation from that point on is to be conducted in accordance with the provisions of the IO, and the voluntary liquidator may remain in office if he satisfies the statutory criteria, otherwise the Official Assignee applies to the court ex parte for the appointment of an eligible licensed IP as the replacement liquidator of the company. An eligible IP may also be appointed in place of a voluntary liquidator by the court on the application made by a creditor.

Administration (IO, Part IV)

An administrator may be appointed by:

  • a qualifying floating charge holder by filing the notice of appointment at court; or
  • a court sanctioned administration order granted upon application made by the company, its directors or creditors (including the qualifying floating charge holder), the supervisor of the company arrangement, the FSC, or the liquidator.

An administration order may only be made by the court if the company is, or is likely to become, insolvent, and if there is reasonable prospect that such order will achieve the objectives of administration, principally to rescue the company as a going concern. However, if the administration order application is made by the floating charge holder, the administration order may be made whether or not the insolvency criteria is satisfied.

The distinctive feature of administration proceedings is that a moratorium is imposed on the continuation or issue of legal proceedings and enforcement actions against the company. The moratorium commences by filing an application for an administration order, or on the appointment of an administrator, and terminates on the dismissal of the application or upon the discharge of the administration order. During the moratorium period any proceedings against the company, generally, may only be commenced with leave of the court.

The directors and other officers of the company remain in office and their powers, functions and duties continue. The administrator acts as the company’s agent and as an officer of the court.

The administrator has control of, and manages, the business, assets and affairs of the company. On appointment, the administrator takes into their custody or under their control the assets and may carry on the company’s business.

Creditors have access to the administrator’s report and regular accounts and payments and progress reports are provided to the members of the creditors’ committee.

Receivership (IO, Part V)

A receiver is appointed over the assets (in whole or in part) of a company by the court, or under a debenture or other security instrument, or in accordance with law. The aim of a receivership is to protect and potentially realise the assets subject to receivership so that the outstanding secured debt is repaid.

Whilst the primary duty of a receiver is to exercise his powers in the best interests of the person in whose interests the appointment was made, he is to take reasonable regard to the interests of the company’s creditors, sureties who may be called upon to fulfil obligations of the company, persons claiming through the company an interest in assets in respect of which the appointment was made, and the company. For example, when a receiver exercises his power of sale of assets, a duty is owed to all the aforementioned persons to obtain the best price reasonably obtainable at the time of sale.

Liquidation (IO, Part VII)

A liquidation is initiated by members passing a members’ resolution to that effect, or by a court order made on the application of the company, its creditors, members, any director of the company, the Attorney General, the FSC, an administrator if the company is in administration, the administrative receiver, or the supervisor of a company arrangement.

The court may appoint a liquidator if:

  • the company is insolvent;
  • it is just and equitable to do so; or
  • it is in the public interest for a liquidator to be appointed.

The majority of applications are made on the grounds of insolvency (see 2.3 Obligation to Commence Formal Insolvency Proceedings). An application for a liquidator to be appointed on the public interest ground may only be made by the Attorney General where a company is a regulated person (see 2.6 Requirement for Insolvency) or where it is carrying on unauthorised financial services business.

The directors and other officers of the company remain in office but cease to have any powers, functions or duties. The liquidator acts as an officer of the court and is also the agent of the company in liquidation.

With effect from the commencement of a liquidation, a moratorium is imposed. This, however, does not affect the rights of secured creditors in relation to the assets subject to any existing security interest.

Unsecured creditors wishing to claim against the company are required to do so in writing and may be asked to provide further particulars of such claim or documentary or other evidence to substantiate the claim. The claim may then be admitted or rejected by the liquidator. If a claim is rejected in whole or in part, the creditor must be notified of the same with the notice setting out the reasons for such rejection.

Mutual credits and debts between the company and its creditors may be set off against each other, in which case only the balance of the account owed may be claimed in liquidation or paid to the liquidator as part of the insolvent company’s assets. Contingent or perspective debt is not subject to set-off.

Whilst there is no obligation on a company to initiate formal insolvency proceedings, the directors are under a duty to provide for the company to cease trading and make the appropriate arrangements, including, where appropriate, placing the company into liquidation, upon its insolvency. Failure to do so may subsequently result in a claim for insolvent trading against the directors personally. See 12.1 Duties of Directors.

A company is insolvent where it is unable to pay its debts as they fall due, or where the value of its liabilities exceeds its assets. Additionally, a company is presumed to be insolvent where it fails to comply with the requirements of a statutory demand made by one or several of its creditors within 21 days, or where the execution on a court decision in favour of a creditor of a company is returned wholly or partly unsatisfied.

The available procedural options available to a company (either directly or via its members, directors or an acting IP) are as follows:

  • administration;
  • voluntary liquidation;
  • involuntary liquidation; or
  • company arrangement.

See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.

For an administration order to be granted, insolvency, or reasonable belief that the company is likely to become insolvent, is required.

A company arrangement may only be proposed by directors if they believe on reasonable grounds that the company is, or is likely to become, insolvent.

Insolvency is not required to commence either voluntary or involuntary liquidation proceedings. There is no requirement of insolvency in order to commence receivership.

See 2.3 Obligation to Commence Formal Insolvency Proceedings.

Entities operating in the financial services sector are more closely supervised and regulated by the FSC.  Such entities are described as “regulated persons” or “licensees” and include banks, company managers/agents, insurance companies, investment dealers, money transmitters, mutual funds and trust companies.

The prior written consent of the FSC is required for a regulated person/licensee to be placed into voluntary liquidation or to enter into a company arrangement. In an insolvent liquidation notice has to be given to the FSC at least seven days prior to the appointment of a liquidator by the members of a regulated person/licensee. Further, the FSC may apply to court for the grant of an administration order, or for a liquidator to be appointed under the IO.

The FCS has wide-ranging powers in relation to the appointment and removal from office of IPs.

Consensual restructurings are likely to be preferred to the extent that it is practicable and possible to preserve the company and enable the business to carry on as a going concern. This is due to potentially improved value recovery, flexibility, lower costs and expediency of informal arrangements.

The statutory regime does not intervene in informal arrangements, and the company does not have to have consensual restructuring negotiations prior to the commencement of a formal statutory process. However, in certain instances insolvency legislation may affect the choice of strategy, eg, the directors may be reluctant to consider an informal workout and prefer to take a more cautious approach by placing the company into formal liquidation proceeding to avoid the risk of personal liability for insolvent trading (see 2.3 Obligation to Commence Formal Insolvency Proceedings and 12.1 Duties of Directors).

There are no statutory provisions governing informal arrangements which a company may enter into. The procedure, including provisions relating to disclosures and access to information, the relevant timescales and the level of involvement of different classes of creditors, is likely to be governed by the terms and conditions of any inter-creditor agreement, or other agreement, among the company and its creditors.

Standstill provisions are frequently utilised to facilitate an informal arrangement process, and may be used to allow time for an agreement to be reached.

Where an informal arrangement is in place, the new priorities regime as agreed among creditors overrides the statutory priority regime.

There are no specific provisions governing the injection of new money into a company in informal arrangement situations. New money is typically obtained in the TCI by way of loans or promissory notes. Subscription for new shares and debt-for-equity swap arrangements are also utilised to attract new money. In general, the flexible corporate regime provided by the CO allows parties wide discretion as to the prioritising of any borrowing and granting of relevant security interests.

In practice, new money is generally given priority by, for example, the company providing security over unencumbered assets, or a second ranking security over existing encumbered assets (subject to the consent of the first security holder). Existing financial creditors and other security holders are generally eager to limit the amount of new money being provided to a company, particularly to a company in financial difficulty.

In the absence of statutory provisions and TCI case law, the approach developed by English and BVI case law is treated as persuasive where relevant.

Generally, in the absence of express contractual obligations the creditors involved in an informal restructuring owe no duties, in particular as regards disclosure, to each other or to the company. When the validity of the exercise of voting powers is called into question, the court will make assessment based on whether the voting power was exercised in good faith and for the purpose for which it was conferred. The exercise of voting powers may be successfully challenged in limited circumstances and, in absence of discrimination and bad faith, a majority decision will stand.

The threshold required to carry out an informal restructuring will depend on the provisions of any existing contractual agreement and/or constitutional documents of the company, as well as the effect of any such restructuring on the creditors’ interests.

It is possible to invoke so called “cram-down” mechanisms to overcome dissenting minority creditors and/or members. The IO and CO do not prohibit or restrict such cram-down mechanisms under the scheme of arrangement and the company arrangement regimes.

In the case of a scheme of arrangement, a majority in number representing 75% in value of the creditors/members (or a particular class of creditors members) present and voting must agree to the proposed compromise or arrangement. This mechanism may be utilised to overcome a dissenting class of secured or unsecured creditors and or members.

Whilst a company arrangement may also be used as a “cram-down” mechanism, it cannot bind dissenting preferential and secured creditors as their written consent is required where the arrangement affects their rights and interests. There is a remedy available to creditors or members to apply to court on grounds of unfair prejudice, so the mechanism should be applied with caution to avoid unfairly prejudicing their interests.

The two main types of security used in TCI are charges over specific assets (including floating charges) and mortgages.

Charges are typically taken over share certificates, and charges (mortgages) are the most common form of security in relation to domestic real estate.

Subject to any existing contractual restrictions among creditors, security is enforced in accordance with its terms and the securityholder has the rights and remedies pursuant to the relevant security instrument. Enforcement is generally permitted upon occurrence of an event of default that is continuing as unremedied/unwaived, or following an acceleration.

A moratorium or stay of enforcement under TCI law applies where a company is in administration or involuntary liquidation, but it does not affect the rights of secured creditors to take possession of, and realise or otherwise deal with, assets over which there is a security interest.

Secured creditors’ claims fall outside the winding-up process as the secured creditors are not strictly a class of creditors participating in the insolvency process. Secured creditors may only claim in the liquidation proceedings to the extent of the balance of the debt owed to them (where the value of the claim exceeds the value of the assets subject to the security interest), or they may surrender their security interest to the liquidator for the general benefit of creditors and claim in the liquidation as unsecured creditors for the entire amount of the debt.

There are no statutory timelines to enforce secured claims and the secured creditors have discretion as to when to take control of the assets and realise those for better returns.

There are no special procedures or impediments that apply to foreign secured creditors.

To the extent a company arrangement affects the right of a secured creditor to enforce a security interest or vary the liability under the security interest, then the written consent of that secured creditor is required.

Secured creditors technically do not participate in the distribution of assets in liquidation as their claims (and the secured estate) would be satisfied upon the realisation of secured assets, unless they choose to surrender their security interest and conversely claim as unsecured creditors.

All unsecured creditors falling within the same class rank pari passu, and if the assets of the company are insufficient to satisfy the claims in full, the creditors of the same class will be paid proportionately. Preferential creditors generally rank behind secured creditors, except where there is a floating charge over the assets, in which case any preferential claims and expenses of the insolvency proceedings rank ahead of the secured creditor’s interest in the assets.

All unsecured trade creditors rank equally in a restructuring or insolvency process. Rights of trade creditors are generally preserved and kept whole. Given that trade creditors tend to provide working capital for a company, and that the business as a going concern is often dependent on them and their continuing goodwill, it is likely to be inappropriate and too difficult to try to compromise trade creditors.

The IO makes various provisions for protecting creditors of a financially troubled company.

Plan of Arrangement

The court may order notice to be given to the creditors and for their approval to be obtained. The court may also determine the rights of dissenting creditors to receive payment of the fair value of their debt obligations.

Scheme of Arrangement

On the application of a creditor the court may order for a meeting of creditors to be called. The approval of 75% in value of the creditors is required for the scheme to be binding on creditors, so there is scope for a scheme to be blocked by important creditors, or by a pool of creditors who do not consider the scheme to be in their best interests.

Voluntary Liquidation or Insolvency Proceedings

The office holder makes advertisements to ensure that creditors are aware of the proceeding in place and can present their claims.

Creditors can make an application for the appointment of a provisional liquidator pending determination of the application for the appointment of a liquidator if there is a risk of dissipation of assets, or where this is in the interests of creditors.

Whilst unsecured creditors may apply for a stay of any other action or proceeding against the company pending the court’s determination of an application for the appointment of a liquidator/provisional liquidator, they are not in the position to disrupt formal involuntary processes. They cannot achieve a stay or deferral of a liquidation. Where a creditor fails to submit its claim to the liquidator within the prescribed time,  it is not entitled to disturb the distribution by reason of not participating in it.

Unsecured creditors may apply to court for the attachment to be imposed over the assets of the debtor company where there is a possibility of the assets being dissipated. However, where liquidation proceedings are commenced, creditors are unable to retain the benefit of such attachment unless it was completed before the appointment of a liquidator.

Where a statutory demand is issued by a creditor, the debtor company has 21 days to comply with its terms, failing which the company is presumed to be insolvent.

Where an unsecured claim is enforced through court application, the general civil procedure rules and timelines apply. If the execution or other process issued on the decision of the court entered in favour of the creditor is returned wholly or partially unsatisfied, the debtor company will be presumed insolvent.

Where the debtor company fails to satisfy the debt in accordance with the terms of a statutory demand or the court judgment in execution proceedings, the creditor should petition the court for the appointment of a liquidator. If liquidation is commenced and a liquidator appointed, the liquidator fixes a date on or before which the creditors must submit their claims. Those failing to submit their claims by the date specified are excluded from the distribution.

There are no bespoke rights or remedies available to landlords under the Insolvency Regime.

There are no special procedures or impediments that apply to foreign unsecured creditors under the Insolvency Regime.

The prescribed priorities in liquidation are:

  • the costs and expenses of liquidation paid in priority to all other claims in accordance with the prescribed priority under the Insolvency Regime;
  • admitted preferential claims – see 5.9 Priority Claims in Restructuring and Insolvency Proceedings;
  • all other admitted unsecured claims; and
  • interest having accrued after commencement of the liquidation.

Any surplus remaining after the payment of the above claims is to be distributed to the members in accordance with any respective rights and interests in the company.

See 5.1 Differing Rights and Priorities.

A list of preferential debts is set out in the Insolvency Rules 2019, namely:

  • amounts due to present/past employees in respect of wages and salary for the period of four months and accrued holiday pay;
  • sums due and payable in respect of medical health insurance premiums or pension contributions on behalf of an employee;
  • sums due to the TCI National Insurance Board;
  • sums due to the TCI Government in respect of any tax, duty, license, fee or permit; and
  • sums due to the FSC in respect of any fee or penalty.

Caps are imposed on the maximum amount of certain claims for those regarded as preferential. Preferential claims rank equally between themselves and will be paid proportionately where the assets are insufficient for those to be paid in full. Preferential creditors are paid in priority to a floating charge holder.

See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.

None of the aforementioned proceedings provide for a moratorium on, or automatic stay of, claims asserted against the company. The company may continue to operate as the main objective of the statutory restructuring is to allow the company time to trade out of its financial difficulties.

Whilst the company may borrow new money, any new creditor will not be bound by the terms of the plan of arrangement, scheme of arrangement or company arrangement entered into prior to incurring fresh debt.

In the case of a plan or scheme of arrangement, no statutory office holder is appointed to oversee implementation of the approved arrangement, and the company’s directors remain in office and retain all their powers and duties.

Where a company arrangement is in effect, a supervisor is appointed by a creditors’ meeting, or by the court in substitution of the existing supervisor, or to fill a vacancy, to oversee implementation of the company arrangement. The company’s directors remain in office, and their powers, functions and duties continue.

Plan of Arrangement

The court determines whether notice is to be given to creditors, and whether their approval must be obtained. The method of any such approval as prescribed by the court would affect the way in which creditors are organised and represented in the restructuring process.

Scheme of Arrangement

Creditors are typically placed in separate classes. On a creditor application, a meeting of creditors, or a particular class of creditors, may be called, subject always to the court’s discretion to call such meeting. The relevant information and all the required explanations accompany the notice. The creditors or the particular class concerned would be asked to vote on the proposed compromise or arrangement, and where the requisite majority is reached the scheme becomes binding on all company creditors, or the particular class of creditors involved.

Company Arrangement

Creditors play an important role in negotiating and approving a company arrangement. A creditors’ meeting is called to vote on the proposal. Prior to the meeting each creditor is provided with notice of the meeting, a copy of the proposal, a report in relation thereto and a copy of the company’s statement of affairs. Written consent of all preferential and secured creditors is required in certain circumstances (see 6.4 Claims of Dissenting Creditors). A supervisor is appointed to oversee implementation of the arrangement and ensure that its terms are for the benefit of all creditors party to the arrangement.

Plan of Arrangement

The court determines whether creditors may dissent from the proposed arrangement and receive payment of the fair value of their claims.

Scheme of Arrangement

Dissenting creditors will be bound by the compromise or arrangement as approved by a majority representing 75% in value of creditors, or a class of creditors, present and voting, subject to obtaining court sanction. This mechanism may be utilised to “cram-down” a class of secured or unsecured creditors (see 3.5 Out-of-court Financial Restructuring or Workout).

Company Arrangement

A company arrangement may not be used to bind dissenting preferential and secured creditors as written consent is required where the arrangement affects their rights and interests. Conversely, unsecured creditors are bound by any company arrangement approved by the requisite majority. A remedy is available to creditors to make a court application on grounds of unfair prejudice, so the mechanism should be applied with caution to avoid unfairly prejudicing the interests of creditors.

The terms of the agreed plan, scheme or arrangement, would govern whether trading of claims is allowed and, if so, the procedure to follow.

A restructuring procedure may be, and will generally be, utilised to achieve administrative efficiency. Note that the formalities (eg, the requisite approvals, notifications, etc) must be observed for each entity within the group involved in the restructuring process.

Whilst there are no statutory restrictions on a company’s use of or sale of its assets, such restrictions may be imposed by the terms of the arrangement made by the parties.

The provisions governing asset dispositions may be set out in the terms of the arrangement and will differ depending on the arrangement made. These include pre-arranged dispositions to certain creditors for fair value, debt-for-equity swaps, or acquisitions by SPVs formed by a particular lender.

Subject to the terms of the company arrangement, the supervisor may dispose of the company’s assets.

The rights of secured creditors may not be affected by a company arrangement without prior written consent unless so ordered by the court.

In a plan of arrangement, the court has discretion to order for consent of the secured creditors to be obtained, in which case it would be impossible to release the security interest without their prior agreement. Conversely, in a scheme of arrangement this will be governed by the terms of the scheme.

Priority new money may be obtained in accordance with the terms of the particular arrangement. A party providing new money should, before approval of the arrangement, seek to protect its interests and may require a voting and lock-up agreement or similar to be entered into providing for creditors to contractually agree to vote in favour of the particular arrangement.

Where the arrangement is in the context of insolvency proceedings (eg, company arrangement), claims will be valued in accordance with the provisions of the insolvency legislation. The supervisor of the company arrangement has limited discretion in this respect.

In a plan or scheme of arrangement situation, the value of claims is determined in accordance with the terms of the arrangement, or under a separate document setting out the basis for the calculation (eg, an explanatory memorandum).

A company arrangement may be challenged on the grounds of unfair prejudice or material irregularity, so arguably any arrangement should satisfy a fairness test (both procedurally and substantively).

The court has discretion to sanction the plan or scheme of arrangement. Under UK case law which the TCI is likely to follow, the test is whether a member and/or creditor could have reasonably approved it in a bona fide manner. 

Non-debtor parties may be released from liabilities in accordance with the terms of the arrangement. This should be exercised with caution in the context of a company arrangement to avoid any potential claim for unfair prejudice (see 6.4 Claims of Dissenting Creditors and 6.12 Restructuring or Reorganisation Agreement).

There are no provisions under the IO or CO providing for set-off under the statutory restructuring proceedings. Set-off in this case may be achieved by agreement among the debtor company and its creditors. Plans of arrangement, schemes of arrangement and company arrangements may include provisions for set-off, which are often similar to the rules applied to set-off in insolvency proceedings.

The implications of a breach of the arrangement are generally set out in the terms of the particular arrangement.

Where procedural or implementation requirements are breached by the company, this is likely to affect the approval process as well as the court’s decision to sanction the arrangement. Where an arrangement is already approved, it is likely to terminate by reason of a breach of its terms by the company.

A creditor would be liable for breach of the arrangement in accordance with its terms. Injunctive relief is available against such creditor.

It is unlikely for existing members to receive or retain any ownership or other property simply on account of their ownership interests as this may adversely impact the ability of the company to make payments to creditors under the existing debt obligations.

Further, in the context of insolvency this could be regarded as a voidable transaction being unfairly preferential to the members, and is unlikely to form part of a scheme of arrangement or a company arrangement.

See 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.

Assets are typically disposed by the appointed IP (administrator, receiver or liquidator).

In a liquidation, the liquidator would negotiate, authorise and execute the sale of assets, save for those assets which are subject to any security interest. A liquidator is an officer of the court and required to act in the best interests of the unsecured creditors as a whole. Aside from that, affected parties do have an avenue of complaint if they consider a liquidator has acted in breach of his duties.

There are no restrictions placed on creditor bidding and the liquidator may decide whether an offer represents fair value, or is in the interests of the creditors as a whole.

The purchaser acquires good title to the assets, "free and clear" from any claims and liabilities as against the company.

In a statutory insolvency proceeding (ie, administration, receivership, administrative receivership or liquidation), there is generally no plan which would be binding upon the company and its creditors. 

In the context of a company arrangement, the implications on the company or its creditors for failing to observe the agreed terms would be prescribed in the arrangement itself, which is binding on the parties.

The insolvency office holder is generally able to borrow new money. Any fresh, unsecured debt would rank pari passu with all other unsecured creditors.

In practice, new money is generally given priority by, for example, the company providing security over unencumbered assets, or a second ranking security over existing encumbered assets (subject to the consent of the first security holder).

The IO does not provide for a special procedural regime for corporate groups. All group companies are dealt with on an entity-by-entity basis. As a matter of administrative convenience, a single IP may be appointed in respect of all companies within the same corporate group.

The courts dealing with corporate group liquidations may join the winding-up petitions of the group companies. Where the companies involved are located in different jurisdictions, a stay of proceedings is often granted pending determination of certain issues in the liquidation proceedings of a different company within the same group by a foreign court.

Where a company is in liquidation, administration or receivership, the creditors may establish a creditors’ committee by way of a creditors’ meeting resolution. Whilst there is no requirement for a creditors’ committee to be formed, it is common practice to do so.

A creditors’ committee consults with the appointed IP on the matters relating to the insolvency proceeding, receives and considers reports of the IP and assists him in discharging his functions. Further, the committee may call a meeting of creditors, require the insolvency office holder to provide it with reports and information, including requiring the IP to attend before the committee in order to provide it with information and explanations regarding the insolvency proceeding.

A liquidator generally has wide-ranging powers with respect to the use and disposal of the company’s assets, and may deal with the assets at his sole discretion. However, certain limits may be imposed by the court order appointing the liquidator, including providing for court sanction to be obtained in relation to carrying out a particular type of transaction. 

Part XVI of the IO sets out the statutory framework allowing TCI courts to assist insolvency proceedings in another jurisdiction by way of granting an order in aid of foreign proceedings.

Assistance may be provided in foreign proceedings in a "relevant foreign country" (such country(ies) as the FSC may designate from time to time).

Recent case law also holds that the principle of modified universalism is regarded as part of the common law and this provides extra-statutory powers at common law to enable the court to assist foreign liquidators.

TCI courts are mindful of the proceedings in other jurisdictions, and subject to the reputation of the courts within that particular jurisdiction, are generally amenable to grant a stay of proceedings pending determination of certain issues in foreign liquidation proceedings where it would help to avoid the unnecessary duplication of costs and facilitate a more orderly process for the benefit of all creditors.

Where an application for an order in aid of foreign proceedings is being considered, TCI courts are guided by considerations relating to ensuring the economic and expeditious administration of the foreign proceeding, to the extent consistent with the following considerations:

  • just treatment of all persons claiming in the foreign proceeding;
  • protection of the persons in TCI who have claims against the debtor against prejudice and inconvenience in the processing of claims in the foreign proceeding;
  • prevention of preferential or fraudulent dispositions of property subject to foreign proceeding;
  • need for distributions to claimants in the foreign proceedings to be substantially in accordance with the order of distributions in a domestic insolvency governed by the IO; and
  • comity.

In addition, considerations of public policy are also relevant as the TCI courts will not permit an order in aid of foreign proceedings where it would be contrary to domestic public policy.

TCI law makes no distinction between foreign and domestic creditors providing for just and equal treatment of all creditors falling within the same class.

However, the prejudice and inconvenience that might be caused to domestic creditors in the processing of claims in the foreign proceedings is taken into account when the court is considering the granting of an order in aid of foreign proceedings.

An eligible and licensed IP will generally be appointed in relation to the company entering into insolvency proceedings. This could be a receiver or an administrative receiver in case of receivership, an administrator in administration proceedings, or a liquidator where a company enters into liquidation.

Additionally, the IO provides for a new officer named Official Assignee, who may act in the capacity of a liquidator, provisional liquidator, receiver or interim receiver. The Official Assignee is appointed by the FSC, and is an employee of the FSC.

Receiver

A receiver/administrative receiver is an agent of the company.

The powers conferred upon  a receiver are set out in the charge or other instrument appointing the same, or the court order pursuant to which the receiver is appointed.

An administrative receiver generally has those powers set out in the instrument appointing the same and also include the powers set out in Schedule 1 to the IO, unless the relevant instrument provides otherwise.

The duties of a receiver and an administrative receiver are to act in good faith and for proper purpose, and to exercise his powers in the best interests of the person in whose interests the appointment was made, but always with reasonable regard to the interests of creditors, other persons claiming an interest in the assets, and the company.

Administrator

An administrator has control of, and manages, the business, assets and affairs of the company in administration, and has wide-ranging powers, including removal and appointment of directors, calling a meeting of members/creditors, and requiring a receiver to vacate office. An administrator may perform any function, and exercise any power, that the company or any of its officers could exercise if the company were not in administration. Specific powers of an administrator are set out in Schedule 1 to the IO.

An administrator is under a duty to perform the functions in accordance with the objectives set out in 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership and as quickly and efficiently as reasonably practicable. Such duties include carrying out an investigation into the company’s affairs, preparing a report, and maintaining accounting records.

Liquidator

A liquidator acts as an officer of the court and is the agent of the company in liquidation.

The principal duties of a liquidator are to take possession of, protect and realise the assets of the company, to distribute the assets, or the proceeds of realisation of the assets, and to distribute any surplus.

A liquidator generally can do all things necessary for the discharge of his duties. The court may direct that the liquidator may only exercise certain powers with its sanction, see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership.

A receiver is appointed by the court or under a debenture or other security instrument. There are certain categories of persons excluded from being receivers, eg, a mortgagee of any assets of the company, an officer or employee of the mortgagee, or a shareholder in the company or a connected entity, etc.

For further detail in relation to receiver’s appointment see 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership. Removal of a receiver may take place according to the instrument pursuant to which the appointment was made, or by court order where the receiver was appointed by court or is an administrative receiver. An application for removal may be made by the company, its directors, the person by or on whose behalf the receiver was appointed, a creditor of the company, or the FSC.

An administrator is appointed by a qualifying floating charge holder, or by the court. For further detail in relation to administrator’s appointment see paragraph 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership. An administrator may be removed from office by the court on the application of the creditors’ committee, a creditor, the Official Assignee, or on its own motion. If removal takes place or the administrator resigns, a replacement administrator is appointed.

A liquidator is appointed by a members’ resolution, or by court order. For further detail in relation to liquidator’s appointment see paragraph 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership. Removal of a liquidator from office is effected by the court on its own motion, or on an application made by the creditors’ committee, a creditor/member of the company, or the Official Assignee. The grounds for removal include the liquidator being ineligible to act as the IP, breach of a duty or obligation under the Insolvency Regime, failure to comply with any direction/order of the court in relation to liquidation, the liquidator’s conduct being below the standard expected of a reasonably competent liquidator, or a conflict of interest. Where the liquidator is the sole liquidator, the court must appoint the Official Assignee or an eligible IP as a replacement.

The office holders acting as a supervisor or interim supervisor of a company arrangement, administrator or administrative receiver, a liquidator or provisional liquidator, fall within the definition of IPs and cannot act without a license. The license is granted by the FSC on the application made by an individual resident in TCI and meeting the requirements set out in the IO and Insolvency Practitioners Code. Certain categories of individuals are disqualified from holding a license under the IO (eg, bankrupt, disqualified and restricted persons).

A foreign IP may lawfully act in insolvency proceedings in TCI jointly with a licensed, local IP.

Attorneys and accountants are typically engaged in TCI restructuring and insolvency processes.

The statutory office holders are generally paid fees for acting in their capacity and reimbursed for any costs and expenses properly incurred in the course of insolvency proceedings. The remuneration of IPs and any professional persons employed to assist them is considered to form part of the costs and expenses of the relevant insolvency proceedings and is paid out of the assets of the company, ranking in priority to all other claims against the company.

Where advisors such as attorneys and/or accountants are employed to assist an IP in performance of his functions, no authorisation or approval is required under the IO.

Conversely, where the professional person is engaged as an IP, those procedural steps set out in 2.2 Types of Voluntary and Involuntary Restructurings, Reorganisations, Insolvencies and Receivership and 9.3 Selection of Officers must be followed.

Where a company is solvent but is facing financial difficulties, attorneys are often engaged to advise on the restructuring options and potential consequences. In the context of insolvency proceedings, attorneys are involved throughout the entire process to advise various parties involved, including:

  • the members and directors of the company on the best cause of action where the company is, or likely to become, insolvent;
  • the creditors for the recovery of any amounts due; and/or
  • IPs in carrying out their duties and exercising their powers.

Accountants generally provide an assessment of the company’s finances to enable the directors to form a view as to its solvency, and often act as IPs where they have been licensed to do so by the FSC. Accountants may be appointed, where necessary, to assist the IP in the performance of his functions.

Whilst it is not common practice for mediations/arbitrations to take place within the TCI, commercial agreements often contain mediation/arbitration clauses providing for arbitration/mediation to take place in nominated centres outside of the TCI (eg, London). In the insolvency context such clauses may be contained in the security instruments or loan agreements.

Mandatory mediation/arbitration is not common practice in the TCI. However, where the parties have a written agreement to submit disputes to arbitration, court proceedings may be stayed to give effect to any such submission.

See 11.1 Utilisation of Mediation/Arbitration and 11.2 Mandatory Arbitration or Mediation.

The arbitration regime in the TCI is governed by the Arbitration Ordinance CAP 4.08 which came into force on 4 April, 1975. There is no separate statutory regime governing mediations.

The process of appointment of arbitrators is typically set out in the arbitration clause of the relevant agreement, failing which the Schedule to the Arbitration Ordinance sets out certain provisions which apply would apply.

Where a company is insolvent, or is on the verge of insolvency, directors owe a duty to take the interests of creditors into account. This was confirmed by the TCI Supreme Court in the joint cases of Pankhurst v Oasis Developments Ltd and Others [CL 40/05] and Connolly v Oasis Developments Ltd and Others [CL 41/05].

The approach preferred by the court is that the duty is owed not to the creditors themselves, but to the company, and in the event of liquidation the liquidator on behalf of the company can enforce the directors’ duty of care for the benefit of creditors.

As a result, directors should be mindful of the true financial state of their company to be able to realistically assess whether there is a reasonable prospect of trading out of financial difficulty, otherwise the directors potentially expose themselves to claims under the IO.

A claim in insolvent trading may be brought by the liquidator against the directors who knew, or ought to have known, that the company had no reasonable prospect to avoid going into insolvent liquidation and allowed it to continue trading. If found liable, they would have to make a contribution to the company’s assets as the court considers proper.

Directors may be sued for fraudulent trading if they were a party to the carrying on of the business of the company with intent to defraud creditors, or with any other fraudulent purpose, at any time before the commencement of the liquidation of the company.

Further, directors may be held personally liable for any misfeasance or breach of any fiduciary or other duty in relation to the company and ordered to repay, restore or account for the money or other assets, or any part of it, compensate the company and/or interest in such amounts and at such rate as the court considers just.

Note that fraudulent conduct of the officers of the company during the period of twelve months preceding the commencement of the liquidation, malpractice in anticipation, and after commencement, of liquidation, misconduct in the course of liquidation, material omissions from a statement relating to company affairs or false representations to creditors, may result in the involved officers being prosecuted and subject to criminal liability.

A claim for breach of a directors’ fiduciary duties must be brought through the company or a relevant IP.

It is possible that the right to bring proceedings may be re-assigned to the creditor (eg, where a creditor wishes to pursue a claim that the liquidator does not wish to, or has no funds, to pursue).

It is not typical for a chief restructuring officer to be appointed in TCI restructurings, and the functions tend to be carried out by the lawyers, accountants and IPs instead.

The concept of shadow directorship is not well developed in the TCI.

TCI law makes no specific reference to shadow directors, and the term “director” under both the CO and the IO refers to “a person who is a member of the governing body of the company, and a person who, in relation to the company, occupies or acts in the position of director, by whatever name called”. There is nothing to suggest that shadow directors owe any special duty to the company or its creditors in the context of insolvency akin to those owed by de jure or de facto directors.

Presumably, a shadow director may be liable in fraudulent trading as the relevant section applies to any person who was knowingly party to the carrying on of the business with intent to defraud, or for any fraudulent purpose.

An indirect reference to a concept similar to that of shadow director is present in the CO relating to nominee directors, namely those directors accustomed or under an obligation whether formal or informal to act in accordance with the directions, instructions or wishes of any other person. The nominee director must inform the company of this fact and provide the particulars of the person for whom the director is acting as a nominee. A company is under an obligation to keep a register of nominee directors, which may be requested for inspection by the Registrar.

A member of the company is generally liable to creditors if he was acting as a shadow or de facto director. The position in relation to shadow directorship in the TCI is less than unequivocal, and it is unlikely that members fall within the definition of “director” under the IO.

Members may be potentially liable to creditors in the context of fraudulent trading if they were knowingly a party to the carrying on of the business with intent to defraud creditors or for other fraudulent purposes.

Where a member has been concerned in the promotion, formation, management, liquidation or dissolution of the company, the member may be found liable if the same has misapplied, retained, or has become accountable for any money or other assets of the company, or if the member has been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company. In such case, the member will be ordered to repay, restore or account for the money or other assets and/or compensate and/or pay interest to the company.

Additionally, where a company is in liquidation, the members may be prosecuted and incur criminal liability if they have been involved in falsification of the company’s books.

The court, on the application of a liquidator, may set aside a number of transactions if they were entered into during the vulnerability period (see 13.2 Look-Back Period):

  • Unfair preferences are transactions that have the effect of putting a creditor into a more favourable position in the event of insolvent liquidation than the one he would have enjoyed had the transaction not been entered into. It must be shown that the company was insolvent at the time of the transaction or became insolvent as a result of it.
  • Undervalue transactions include gifts and other transactions where the company receives no consideration, or consideration the value of which is significantly less than the value of the consideration provided by the company.
  • Voidable floating charges are floating charges entered into at the time when the company was insolvent or that caused the company to become insolvent except for the charges securing a newly acquired value.

Extortionate credit transactions are those transactions which involve the provision of credit to the company on grossly unfavourable terms which contravene the ordinary principles of fair trading (eg, requiring grossly exorbitant payments).

The duration of the “vulnerability period” depends on the particular transaction in question as well as whether a party to a transaction is a “connected person”.

For unfair preferences, undervalue transactions and voidable floating charges, the look-back period is six months prior to the onset of insolvency and extended to two years for transactions entered into with connected persons.

In relation to extortionate credit transactions, the look-back period is five years.

A claim to set aside or annul a voidable transaction may only be brought by the company’s liquidator. There are several defenses available, including:

  • as to unfair preference, that the transaction was entered in the ordinary course of business;
  • as to undervalue transactions, that the transaction was entered into in good faith and for the purposes of the business and where there is a reasonable belief that the transaction will benefit the company;
  • as to voidable floating charges, that the floating charge secured the value of the benefit received by the company (money advanced or paid, liability discharged or reduced, assets sold or supplied or services supplied); and
  • as to extortionate credit transactions, that the nature of the risk was accepted by the person providing the credit.

The court may make various orders, including setting aside the transaction in whole or in part, rescind an unfair preference/an undervalue transaction and restore the prior respective positions of the parties, varying the terms of an extortionate credit transaction, surrendering the assets, or repaying moneys received in relation to an extortionate credit transaction. The list of remedies under the IO is not exhaustive.

Valuations are an important part of the restructuring and insolvency process, and may be initiated by different parties depending on the circumstances and the aim to be achieved.

Firstly, a valuation may be sought by the company’s directors or members in a restructuring context where the company is still not beyond economic redemption but is experiencing financial difficulty as an aid in selecting the most appropriate strategy best suited to meet the needs of the company and its members. A valuation may also be necessary in order to determine whether the company meets the solvency test before it is placed in voluntary liquidation.

In the context of insolvency, a valuation may be required to determine the point at which the company should have ceased to trade, and can be initiated either by creditors seeking to avoid certain transactions entered into by the company, or by the directors who owe fiduciary duties to the company and might be personally liable if the company continues to trade whilst insolvent.

An IP may also initiate a valuation to assist in the process, or by a creditor/secured lender to gain a better understanding of the potential recovery in the relevant insolvency proceedings. Further, a valuation may be initiated by any interested party at any point during the insolvency proceedings to determine whether the dispositions of the company’s assets have been made properly.

See 14.1 Role of Valuations.

The larger accounting firms in the TCI have capabilities in standard valuation procedures and have contacts from outside of the TCI with professional valuation qualifications. Some of the standard methodologies used are earnings multiple approach, income-based approach, owner benefit approach, rule of thumb, asset-based approach and market-based approach. An asset-based approach is generally a worst-case scenario approach and is applicable when the business is in financial difficulty.

If the relevant office holder has a reasonable level of expertise it would be prudent for him to undertake his own valuation process as he would likely know the business better than others. An M&A process or other form of market testing is generally not required, but in most cases it is best to complete a professional valuation process to protect all practitioners involved and avoid any potential complications from valuation challenges by disgruntled creditors/stakeholders.

The process for a forward-looking valuation is detailed and structured, and relies on a significant amount of independent data collected from reliable sources. The valuation would assess the value of the business based on several methods using independent data and would analyse the results to determine which methods are most applicable before completing the assessment of the value.

In a standard assessment the analysis is based on fair market value, being the price at which the property/business would change hands between a willing buyer and a willing seller both having reasonable knowledge of the relevant facts. In a situation where it is clear that the entity is insolvent the liquidation value is key to the liquidation process. In practice the liquidation value is typically determined as a discounted amount from the “fair market value”.

Griffiths & Partners (G&P)

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Providenciales
Turks and Caicos Islands

+1 649 941 8250

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lb@griffithsandpartners.com www.griffithsandpartners.com
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Law and Practice

Authors



Griffiths & Partners (G&P) is a leading, full service commercial law firm of attorneys based in the Turks and Caicos Islands (TCI). The firm advises international clients, law firms and intermediaries in a broad field of disciplines, including corporate (including economic substance), banking, finance and regulatory, litigation (including dispute resolution, insolvency and restructurings), real estate, and trust and private wealth. The firm is part of G&P Group, one of the largest professional service teams in the TCI, offering legal, trust (via Coriats Trust Company) and company management and formation services (via G&P Corporate Services). G&P is regularly involved in the highest profile legal and business work in the TCI. The attorneys are internationally qualified and admitted to practice in the TCI. The firm would like to extend thanks to Ryan Blain, partner at WB Financial Group, and also to Daria Klimenko, paralegal at G&P, for their valuable contributions to this chapter. Ryan is a CPA and has over 15 years of professional accounting and management experience. Daria graduated from the University of Cambridge with a Masters degree in commercial law specialising in corporate finance, competition law and international commercial litigation, and has recently been providing assistance and support in several ongoing insolvency and restructuring matters in which G&P is acting.

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