Background

The most recent in-depth regional study carried out in September 2021 confirms the long-held view that the insolvency laws and practices in our Caribbean territories are in need of substantial reform. However, it is not merely the legislation that needs to be addressed; there is a pressing need to improve our operational mindset, practices, and awareness. To bring about real change requires a strong grasp of the historical nuances and, crucially, proper assimilation of the various trends globalisation has brought to the Caribbean region over the past decade.

A common feature shared by Commonwealth Caribbean countries is a distinctly fragile economy. Many rely heavily on tourism, while others are dependent on fossil fuels. For all or most, there is the constant threat of devastating hurricanes and other natural disasters, factors that increase the likelihood of businesses facing insolvency and seeking recourse under various existing laws.

There are four key areas identified for significant development and revitalisation, which we will explore in varying degrees of detail:

• dedicated and modernised legislation; 
• training and awareness-raising;
• harmonisation of intra-jurisdictional and regional legislation; and
• creating a cohesive Caribbean insolvency group.

Dedicated and Modernised Legislation

Several Caribbean jurisdictions lack dedicated bankruptcy legislation, relying instead on provisions within their companies’ laws. These existing provisions and mechanisms do not adequately address the demands of insolvency jurisprudence. In some jurisdictions, new legislation has been introduced, albeit many years ago. Barbados enacted its Bankruptcy and Insolvency Act in 2001, modeled entirely on the Canadian Bankruptcy and Insolvency Act, with a focus on offering distressed debtors a chance for rehabilitation and reducing the stigma associated with bankruptcy. This Act was motivated by a combination of political, social, and economic factors.

Similarly, Trinidad introduced its Bankruptcy and Insolvency Act (BIA) in 2007, but it was not proclaimed until 23 May 2014. Jamaica followed suit with its Insolvency Act and Regulations, implemented in 2014 and 2015, respectively.

Lack of Rules and Structure

The absence of specific rules and regulations in Barbados has significantly hindered the effectiveness of its bankruptcy practice. This shortfall has rendered our models ineffective in achieving their intended purposes. The legislative gaps and lack of formal rules underline the urgent need for reform to reflect the dynamic commercial landscape of the 21st century. Presently, corporate rescue and reorganisation procedures in the Caribbean are largely inadequate; as a result, companies that could potentially be saved are being forced into liquidation, invariably leading to losses for their creditors.

To stimulate economic growth, it is crucial to foster an environment that encourages entrepreneurs and businesses to take calculated risks and to attract foreign direct investment. Without these measures, the region risks economic stagnation. The CAIPA paper highlights that most countries in the region rank in the bottom 50% globally in terms of Doing Business Indicators and procedures. The business climate has remained stagnant during the last decade, showing some signs of deterioration.

As noted by the IADB, “At a regional level, registering property and getting credit are the two worst-performing DB indicators, followed by resolving insolvency. All three affect access to finance. Registering property affects the ability to access finance by affecting firms’ availability of collateral. Delays in resolving insolvency increase the risk of lending and therefore also indirectly affect access to finance”.

Training and Awareness-Raising

Studies have shown that training and raising awareness on the effective utilisation of insolvency regimes can serve as a powerful enforcement tool. Our own experience in Barbados corroborates this finding. Research indicates that a significant number of businesses in Barbados are not fully utilising the current insolvency regime. The reasons for this underutilisation are multifaceted and can be reasonably inferred from existing data. It is important to note that there has been no up-to-date research on this issue in Barbados since 2013, resulting in somewhat outdated and limited data.

The IADB paper concludes by highlighting several issues that plague Caribbean businesses in general, including a shortage of trained workers and specialised skills. Additionally, the region has grappled with a significant “brain drain” of its skilled labour force for decades. Regardless of the underlying causes, the realities remain undeniable: Caribbean businesses face a greater risk of failure compared to their counterparts in other parts of the world. Consequently, these businesses may require far more financial assistance than they currently receive. Data from the Caribbean Development Bank further underscores this point, indicating that in the wake of the COVID-19 pandemic many businesses are still compelled to increase borrowing while reducing investments.

Business Rescue Considerations

Studies have demonstrated that “Business Rescue” is generally regarded as a more favourable option compared to business closures and liquidation. “It includes continued business operations, the possibility of job preservation, and a greater recovery for creditors than through business closure and liquidation”.  Despite it being attractive or preferred, it is also noted that business rescue should only be attempted where there is a realistic possibility of recovery. The study shows that “In a significant percentage of cases this will not be the situation, and some form of business closure and liquidation will be the most likely course of action to maximize the value of the remaining assets”.

The CAIPA study referenced the UNCITRAL Legislative Guide on Insolvency Law, which set out the primary objectives of an effective insolvency system.  The key points include:

• including provisions addressing both reorganisation and liquidation of a debtor;
• providing for a modern, harmonised and fair framework to effectively address instances of cross-border insolvency; 
• providing for timely and efficient yet impartial resolution of insolvency; and
• ensuring predictable insolvency laws.

Stevanovich’s unpublished paper “Key Elements BK Law” offers a comprehensive analysis of the essentials for an effective insolvency statute, and is an invaluable guide for evaluating the current Caribbean legislation. It identifies four main drivers of an effective insolvency regime:

• a legal framework that is properly balanced;
• implementing institutions that are effectively enabled;
• creditors that are adequately empowered; and
• professionals who are competent and adequately compensated.

Cross-Border Considerations

The recent FTX collapse has highlighted the pressing need for enhanced cross-border insolvency frameworks. In the FTX case, the primary company was an Antiguan IBC with its headquarters in the Bahamas. It also had subsidiary trading entities in the US. In November 2022, the US entity filed for Chapter 11 bankruptcy, triggering a jurisdictional tug-of-war between Bahamian regulators and Antiguan authorities. This case underscores the critical importance of robust cross-border insolvency mechanisms, as the underlying dispute centred on the jurisdiction and priority of the bankruptcy courts.

Revitalisation efforts in the Caribbean could greatly benefit from the appointment of specialised judges and, to some extent, insolvency practitioners (IPs). Currently, the shortage of judges with either the time or experience to handle bankruptcy proceedings poses a significant challenge. Moreover, studies have shown that Barbadians are generally hesitant to utilise the proposal and assignment procedures outlined in the Barbados legislation. Additionally, the high costs associated with bankruptcy and insolvency proceedings under the legislation may be a major deterrent.

Until these concerns can be addressed by proper awareness-raising, lowering of costs and a more efficient justice system, amendments to the law alone are unlikely to have a significant impact. The underlying systemic issues must be addressed to create an environment conducive to effective insolvency resolution.

Harmonisation of Intra-Jurisdictional and Regional Legislation

Most local businesses have a presence in several territories within the region, and the current diversity in rules and regulations adds significant complexity to operating a cohesive business across the region. This issue becomes even more pronounced during business wind-up or receivership processes. 

One notable example is the requirement in municipal legislation for the recognition of trustees within each jurisdiction. While the rationale behind this requirement is understandable, it can lead to variations in practice and outcomes when the same bankrupt entity is administered by a variety of practitioners. This lack of uniformity has the potential to create chaos, further complicating an already challenging process.

A solution to these issues could be the establishment of a centralised regulatory body in the Caribbean with regional oversight, accreditation, and regulation. Such an entity would facilitate more streamlined management of regional businesses and provide greater consistency in insolvency practices across territories. This would not only ease operational burdens for businesses but also provide more predictability for lending institutions engaged in regional lending, particularly in the context of loan syndication.

Colonial Life Insurance Company (CLICO)

The collapse of CLICO in January 2009 serves as a pivotal example highlighting the necessity for intra-regional cohesiveness in the Caribbean. This incident marked a significant turning point in the insurance industry and its regulation within the region. As the then Governor of the Central Bank of Trinidad and Tobago Jwala Rambarran aptly summarised, “We need a culture of change. The financial rakshasas (demons) who believe ‘greed is good’ must be conquered”.

The Financial Institutions Act, established in Trinidad, marked a positive step towards regulating financial industries. However, its scope does not extend to the regulation of insolvency. The legal provisions concerning this area are scattered across multiple legislations, not consolidated in one place. This dispersion creates practical difficulties for lenders and practitioners, requiring them to interact with various government agencies, which is less efficient and can lead to complexities in managing financial and insolvency matters.

A Cohesive Caribbean Insolvency Group

Restructuring and insolvency professionals are well acquainted with INSOL (The International Association of Restructuring, Insolvency & Bankruptcy Professionals). According to its vision statement, it is “the global association for restructuring and insolvency professionals operating in every country. We influence global restructuring and insolvency practice and policy, supported by a membership who share a global perspective”. Given the unique economic and cultural landscape of the Caribbean, we strongly believe that there is a need for a similar regional association to address the specific needs and challenges faced by restructuring and insolvency professionals in our region. Such a body would not only foster collaboration and knowledge sharing among Caribbean professionals but also facilitate interaction with INSOL and other relevant international organisations.

Such a dedicated association could be instrumental in realising the three previously discussed solutions. It would be a specialised entity focused on developing harmonised legislation, enhancing awareness-raising efforts, and improving training for those involved in insolvency matters. Additionally, this body could play a pivotal role in creating a comprehensive database of publications, reports on cases, and matters pertinent to the entire region.

Furthermore, this body could take responsibility for the accreditation and recognition of trustees across the Caribbean. In essence, the establishment of such a body could act as a key catalyst for the much-needed revitalisation of insolvency practices and legislation in the Caribbean, bringing together expertise and resources to address region-specific challenges effectively.

The formation of a Caribbean insolvency association is not only timely but would play a crucial role in training practitioners in the nuances of modern finance, especially in areas like asset recovery, which currently pose significant challenges in insolvency cases. The evolving global business landscape necessitates that IPs possess a deep understanding of contemporary financial practices, moving beyond traditional methods and limited perspectives. Such a Caribbean insolvency body is envisioned as a key facilitator in expanding and updating the knowledge base of practitioners in the region.

Modern Economic Trends and Insolvency

The past decade has witnessed a gradual but significant transformation in global commerce and international trade, culminating in a more rapid shift in recent years. For insolvency practitioners, this evolution has brought new challenges and opportunities, particularly in the realms of crypto-assets and decentralised finance (DeFi) markets.

Crypto and Blockchain Technology

Stablecoins, a subset of cryptocurrencies, have managed to maintain relatively stable values, largely because they are pegged to major fiat currencies like the USD, GBP, or EURO. Prominent examples of these coins include BTC (Bitcoin), ETH (Ethereum), and USDT (Tether).

The underlying technology of these cryptocurrencies, blockchain, is a decentralised peer-to-peer network. In this system, data is distributed across nodes that are equally privileged, each holding a copy of the ledger. The network operates on predefined rules to achieve consensus and verify the authenticity of data. Each entry in the blockchain is authenticated, contains a unique digital fingerprint or “hash”, and is linked to the previous block in the chain. This structure makes it nearly impossible to alter any data on a block without changing the entire chain. This robust and transparent mechanism has been fundamental to the rise of decentralised finance (DeFi) markets.

While the adoption of blockchain and cryptocurrencies is becoming more widespread in business and financial institutions as part of their long-term strategies, the crypto industry remains volatile, experiencing periods of downturns known as “crypto winters.” With each cycle, the financial impact seems to grow, in part due to the increasing involvement of institutional, retail, and even governmental entities in the crypto markets. The interconnectivity among crypto firms and the rapid evolution of the market, coupled with still-developing risk management policies, contribute to this volatility.

In the Caribbean, certain territories are recognised as major offshore financial hubs, notably the British Virgin Islands and the Cayman Islands. These offshore jurisdictions attract corporate entities and structures drawn by the favourable financial environment, particularly in the crypto economy. Popular businesses in these areas include:

• crypto exchanges, brokerage and dealing services;
• crypto lending and borrowing platforms; and
• retail and institutional investors and venture capitalists.

The rapidly evolving nature of crypto transactions and the complexity of crypto assets present new challenges and opportunities for IPs in the Caribbean. These developments are beginning to shape the jurisprudence in the region, especially in the British Virgin Islands, where Dentons has observed an increase in insolvency cases involving these types of businesses. High-profile cases include:

• Three Arrows Capital (“3AC”);
• Terra USD; and
• FTX.

We will examine the case of 3AC as a case study.

Treatment of crypto as assets in the Caribbean

It is useful for us to address the treatment of cryptocurrency by the Caribbean Courts in insolvency proceedings. In the BVI, this issue was discussed and determined in the case of Philip Smith & Jason Kardachi v Torque Group Holdings Ltd, in which it was determined that crypto-assets are to be considered assets for the purposes of liquidation. In coming to this conclusion, the court considered:

• the definition of an “asset” pursuant to the BVI Insolvency Act, 2003;
• the UK Jurisdiction Taskforce (UKJT) publication titled “Legal statement on cryptoassets and smart contracts”; and
• The English High Court case of AA v Persons Unknown & Ors re Bitcoin.

The Torque case also considers ownership of crypto-assets and relies on the guidance of the UK Jurisdiction Taskforce. In this case, the court concluded that, once there is sufficient evidence to support ownership, crypto-assets can form assets within the estate of a company.

The BVI Insolvency Act has been heavily influenced by UK legislation. However, throughout the Caribbean, some jurisdictions have adopted elements of Canadian legislation in their insolvency legislation and even in their Companies Acts. When one examines the definitions of “assets” and/or “property” across the region, the constituent elements contained in the BVI legislation are almost identical and in most cases, even more expansive. This similarity provides a strong basis for a unified interpretation across the Caribbean, particularly in considering crypto-assets as assets for the purposes of liquidation.

For IPs, a critical issue now is the tracing and recovery of crypto-assets for the benefit of creditors. Blockchain technology, known for its transparency and clarity in tracking the movement of cryptocurrency, makes it relatively easy for a liquidator to trace the transfer of assets from a company’s possession to an end user’s wallet. The real challenge lies in identifying these end users. Particularly difficult is the situation where these wallets are located outside the originating jurisdiction, as this adds complexity to obtaining injunctive relief in a timely and effective manner.

Three Arrows Capital (“3AC”) case study

3AC was a cryptocurrency hedge fund, incorporated in BVI, and operating out of Singapore, which managed about USD10 billion in assets, making it one of the most prominent crypto hedge funds in the world. 3AC’s strategy involved borrowing money from across the industry and then investing that capital in other, often nascent, crypto projects. The firm had been around for a decade, which lent founders Zhu Su and Kyle Davies considerable credibility in the industry. Nik Bhatia, a professor of finance and business economics at the University of Southern California is quoted as saying “3AC was supposed to be the adult in the room.”

However, 3AC faced severe difficulties following the collapse of the stablecoin Terra UST in May 2022, which drastically reduced the value of a significant portion of its assets. In response, the directors placed a substantial bet on Bitcoin between the Terra/Luna collapse in May and the appointment of liquidators to 3AC in late June. They hoped that a Bitcoin rally would restore the fund to solvency.

From an IP’s perspective, this situation raises critical questions. One must consider whether the directors should have been aware of the company’s insolvency at the time and whether their actions could be construed as wrongful or fraudulent trading.

Both creditors and the company itself sought to appoint provisional liquidators, but with differing objectives. The creditors aimed to protect 3AC’s assets, while the company sought a “light-touch” provisional liquidation to provide breathing space for restructuring. Justice Jack, however, sided with the creditors, opting to appoint their nominated IPs from Teneo over the company’s choice from Interpath.

Notably, since all parties agreed on 3AC’s insolvency, Justice Jack, on 27 June 2022, chose to place 3AC into full liquidation, bypassing the usual requirements such as advertising the petition.

As with the founders of other high-profile crypto businesses that have gone into insolvency, the founders of 3AC continued to give interviews with the media and even tried to launch a new product, a distressed debt marketplace called OPNX. Meanwhile, the liquidators claimed that they were not co-operating with them. This situation was further complicated by the fact that the founders’ whereabouts were unknown for an extended period after 3AC’s liquidation.

The matter was further compounded by issues of preference claims and one such example was the fact that 3AC’s directors ordered a USS50m+ super yacht, named “Much Wow” which was allegedly purchased using funds borrowed from 3AC.

The liquidators subsequently sought Chapter 15 recognition of the BVI liquidation in the USA, which gives foreign creditors the right to participate in US bankruptcy cases and prohibits discrimination against foreign creditors. This recognition was granted in early July 2022, highlighting the principle of comity in international law – a doctrine that underscores respect and deference to the laws, policies, and judicial decisions of other countries.

The unsecured creditors’ claims in the liquidation are in the region of USD3.3 billion. The remaining assets in 3AC’s estate appear to be under USD1 billion. Some of the major creditors of 3AC include Voyager, Celsius and Genesis, which have themselves gone into insolvency proceedings.

A creditors’ committee was elected by the unsecured creditors in July 2022, which supervises the liquidators and assists them with making strategic decisions and approving their fees and expenses.

As 3AC is in liquidation in the BVI, with recognition as a foreign proceeding under Chapter 15 in the US, the 3AC liquidation (the second largest crypto insolvency yet after FTX) is being run and directed from the BVI under the supervision of the BVI courts and the BVI creditors’ committee.

The case thus far has involved a number of precedent-setting orders, including the first known order for examination of directors of an insolvent BVI company who are based outside of the BVI, and the service of a US subpoena by Twitter.

Conclusion

It is clear that IPs in the region are keen to improve and modernise the way insolvencies are handled in the region. A collaborative effort is essential to strengthen the various elements of the insolvency regime. The initiatives and solutions proposed, such as the formation of a specialised Caribbean insolvency body and embracing new technologies and methodologies, are steps in the right direction. By adopting these measures, the Caribbean region could achieve a more robust and efficient insolvency framework, aligning with the evolving economic landscape and the unique challenges it presents.