A court in the British Virgin Islands has confirmed long-standing practice in cases of insolvency, deciding that debts owed to past members for redemption proceeds give them “deferred creditor” status. Thus, in the event of an insolvency, these debts rank behind external creditors, but rank above any payout to existing members.
The case, Somers Dublin Ltd. V. Monarch Pointe Fund, came to the Eastern Caribbean Supreme Court on an appeal taken by four redeemed shareholders, from a decision in the court below that distributed assets pro rata between continuing and redeemed members.
Typical Articles, Atypical Liquidation
Monarch Pointe, a fund incorporated in the BVI in December 2003, with a Memorandum and Articles of Association that the court considered typical, providing “for members to be able to redeem their shares in accordance with a set of regulations of the type which are frequently encountered in cases of this sort.”
Monarch Pointe suspended redemptions in August 2007. At this time, seven redeemed members had yet to receive approximately $18 million between them of redemption proceeds
The following year, the High Court appointed a liquidator, who determined that after paying external creditors there was only $3.5 million to be paid to actual and former members. That was enough (given pro rata distribution) to give each actual or former member of either type about five cents on the dollar against the subscription price of their retained shares.
The liquidator sought directions from the trial judge that he be permitted to make a priority distribution to redeemed members. But in May 2012 the trial judge refused to give that permission, instead ordering pro rata distribution, including the outstanding balance of the redemption proceeds to former members on an equal footing with the subscription price paid by the continuing members. He also instructed parties wanting to vary that direction to make an application to do so.
Four redeemed members did make that application and the trial judge heard their arguments, but issued another order in November essentially restating the directions he had given the liquidator in May: hence, this appeal.
Section 207 of the BVI Business Companies Act provides a prima facie order of priorities in case of liquidation, thus: first the costs of the liquidation itself; the preferential claims “admitted by the liquidator,” then “all other claims,” then any interest payable under section 215.
Counsel for the continuing members had claimed that redeemed [but unpaid] former members are nowhere on this list, that they consequently fall down a “black hole” and have no claim at all. In the alternative, they claimed, and the trial judge agreed, that they are to be treated along with ordinary unredeemed members.
Saved from the Black Hole
But, as the Eastern Caribbean Supreme Court has now said, the language of section 207 is not dispositive. The prefatory language of that section says that this order is to be followed “unless and to the extent that this Act or any other enactment provides otherwise.” Another section, 197, does provide otherwise. That section provides that the money due a past member “is to be taken into account for the purposes of the final adjustment of the rights of members and, if appropriate, past members between themselves.”
The court has then ordered that the May 2012 directions be replaced by “an order that the liquidator do pay the redeemed members of the fund pro rata their redemption price in priority to the distribution of any surplus assets to the continuing members.”