It is often said that the Court’s power to appoint a liquidator over a company is discretionary in nature.  Indeed, the BVI court’s discretion is explicitly enshrined in statute: section 167 of the Insolvency Act, 2003 (the “Act”) grants the Court broad powers at the hearing of an application to appoint a liquidator, to make an order appointing a liquidator, dismiss the application, adjourn the application or make any other order it sees fit[1].

In its oft-cited decision in Trade and Commerce Bank v Island Point Properties S.A et al (unreported, HCVAP 2009/12, 13 August 2010) the Eastern Caribbean Court of Appeal emphasised the broad nature of the Court’s powers in the context of applications to appoint liquidators.  In particular, the Court can entertain arguments by the company that the debt is disputed or not a proper debt, despite the existence of a default judgment or an unsatisfied statutory demand.  In that case, the Court of Appeal found that even where a respondent company was the subject of a statutory demand which had neither been set aside nor paid within the strict time limits afforded by the Act, the Court was entitled to enquire as to the basis of the statutory demand.  If the statutory demand was based on an asserted claim which was not a “debt”, the statutory demand was “bad” and the state of statutory insolvency under section 8 of the Act did not arise.  English and Australian courts have also repeatedly found that they have a similar power to “go behind” a default judgment in appropriate cases.

In deciding applications based on the insolvency of the respondent company, the BVI courts have frequently “gone behind” statutory demands and default judgments in that manner, and declined to appoint a liquidator.

It is therefore clear that where a “substantial dispute” exists as to the validity of a debt, the fact of an unsatisfied statutory demand or default judgment will not operate to prevent a respondent company from raising the substantial dispute in opposing the appointment of liquidators, even if it has missed the deadline for setting aside the statutory demand or default judgment.

The question recently arose (in an unreported case) whether the broad powers enjoyed by the Court should be exercised to decline the appointment of a liquidator in circumstances where the respondent company itself did not oppose the application or otherwise raise any dispute over the debt.  Broadly speaking, while the same broad discretion arises on every application, such discretion must be exercised “judicially” and in a manner consistent with principle.  In the context of an application which is not opposed by the respondent company, two general propositions militate heavily in favour of the appointment of liquidators by the Court:

1. First, in considering whether or not to appoint a liquidator the court has regard to all the circumstances of the case as established by the material before the court. The court will consider those reasons why the company should be wound up compulsorily, and those which constitute reasons why it should not.  The court will carry out a balancing exercise giving such weight to the various factors as is appropriate in the particular case[2].  If there is no material before the court which establishes a reason why the court should not appoint a liquidator, the Court will generally have little option but to accept unopposed evidence before it as true and as establishing the grounds for appointment; and
2. In Re Demaglass Holdings Ltd[3], Mr Justice Neuberger (as he then was) laid out some general principles which apply to guide the Court’s exercise of discretion in cases where a winding up petition is opposed by third parties (such as other creditors).  Although noting the broad terms of the statutory discretion, Neuberger J held that in the absence of a good reason (such as the opposition of a majority of creditors or the lack of a prospect of benefit from the appointment of a liquidator), a creditor of a company who has not been paid is entitled to a winding up order virtually as of right.

Further, although the Court has a discretion to refuse a winding up order where the applicant is pursuing a purpose other than the winding up of the company for the benefit of the creditors (Re a Company (No 001573 of 1983) [1983] 1 BCC 98937 in which an application was dismissed because the applicant issued it with the purpose of causing the forfeiture of a company’s leasehold premises, which the applicant intended to rent for itself), the mere fact that there is a collateral purpose should not lead to that result as long as the winding up will benefit creditors generally.  For example, in Astra Resources plc v Credit Veritas USA LLC [2015] EWHC 1830 (Ch) the “collateral purpose” of the petitioner in this case was to implement a restructuring plan, which was for the benefit of creditors as a whole, and so the English High Court held that winding up was proper (and refused an injunction to restrain advertisement of the application to wind up).

It follows that, in cases where a company does not actively oppose the application, an applicant who has established an unpaid debt in evidence, and who is not pursuing aims that are inconsistent with the statutory purpose of winding up, should ordinarily be entitled to the appointment of a liquidator, virtually as of right.  In practice, therefore, the broad discretion of the court narrows considerably.