In an earlier article we commented on the decision of Bannister J. in Somers Dublin Ltd & others v Monarch Pointe. The judge decided that redeemed (but unpaid) members of a fund in liquidation ranked equally with the continuing members, i.e. those who had not given notice to redeem. That decision had caused concern in the market because the prevailing view had been that redeemed members ranked ahead of continuing members.
The dispute had arisen because the interaction between the relevant provisions of the BVI Insolvency Act is not entirely clear. The priority of payment of claims is dealt with in s. 207. Admitted claims are paid in accordance with s. 207(1) and (2), with any surplus then distributed to members under s. 207(3). By virtue of s. 197, redeemed members may not submit a claim in the liquidation for redemption proceeds, though any such sum “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 Act defines a creditor as a person who has an admissible claim in the liquidation. In essence, the first instance judge had decided that the combination of s. 197 and the definition of creditors meant that redeemed members were not creditors and that, although s. 207(3) does not refer to past members, it should be read as if it included redeemed members, but with the effect that all continuing and redeemed members ranked pari passu.
The matter came before the Court of Appeal earlier this year, which reversed the decision of the judge and restored the position to that which most expected to operate: i.e. redeemed members are deferred creditors and so rank ahead of continuing members. The Court of Appeal held that s. 197 merely prevented redeemed members from ranking pari passu with “outside” creditors, and that, while they are not creditors with standing to seek to appoint a liquidator, they are creditors in a wider sense. That being so, they rank ahead of continuing members.
In effect, the judgment acknowledges that there is a lacuna in s. 207: first, “outside” creditors are paid in accordance with s. 207(1) and (2); secondly, once all “outside” creditors are paid in full, redeemed members are paid on the basis that the sums due to them are liabilities of the company, this entitlement springing from s. 197 rather than any express provision in s. 207; and finally, any surplus remaining is then paid to continuing members in accordance with s. 207(3).
The Court of Appeal’s decision therefore represents a welcome clarification of the position, and a return to the orthodox view.