Russell Crumpler & Christopher Farmer (as Joint Liquidators of Three Arrows Capital Ltd (in Liquidation)) v Three Arrows Capital Ltd (in Liquidation) and BVIHC (Com) 2022/0119 (unreported 26 July 2023)

The BVI liquidation of Three Arrows Capital Ltd (“3AC”) has produced a number of important decisions on various BVI law issues. Perhaps the most important of those decisions, which has not been widely publicised due to the fact that it was delivered orally, was handed down in July 2023 and concerned an application by the Joint Liquidators (“JLs”) seeking sanction (the “Sanction Application”) to commence proceedings (in the name of the company) in the State of New York under Chapter 11 of the U.S. Bankruptcy Code (the “Proposed Chapter 11 Proceedings”).

As the BVI Court recorded in its judgment, the relief sought in the Sanction Application was unprecedented (at least in the BVI, and possibly wider than that), in that it appeared to represent the first known attempt by liquidators of a company that was already in liquidation in the BVI (which was the main insolvency proceeding) to commence a fresh plenary or main liquidation proceeding in a foreign jurisdiction (in this instance, in the US).

The Sanction Application was ultimately dismissed by Justice Mangatal on 26 July 2023, although permission to appeal was granted and that appeal remains extant. Mangatal J’s decision addressed several important points of BVI law, including the common law principle of modified universalism. Subject to the Court of Appeal’s views, the decision is likely to be precedentially important in (at least) the BVI.

Modified Universalism and the Sanction Application

The Common Law Principle

As explained by the Privy Council in Cambridge Gas1 and the English House of Lords in HIH Casualty2, the common law principle of modified universalism has been the “golden thread” running through English cross-border insolvency law for the last 200 years. Central to that principle is the proposition that it is fairer to all creditors if there is a unitary and universal liquidation, generally in the place of the company’s incorporation, in which all creditors are entitled and required to prove. In Singularis3, Lord Mance explained the rationale for the principle as being “founded on the public interest in the ability of foreign courts exercising insolvency jurisdiction in the place of the company’s incorporation to conduct an orderly winding up of its affairs on a worldwide basis notwithstanding the territorial limits of the jurisdiction.”

The concept of modified universalism broadly underpins the UNCITRAL Model Law on Cross-Border Insolvency, which has been implemented in a number of jurisdictions worldwide (but not in the BVI).

The Sanction Application

3AC was wound up in the BVI on 27 June 2022, and the JLs were appointed on that date. Just under a year later, in May 2023, the JLs issued the Sanction Application.

The JLs’ stated purpose for seeking sanction to place 3AC into Chapter 11 bankruptcy was to enable them to access certain transaction avoidance powers that they asserted were available under US law, in order to, principally, use those powers to pursue certain avoidance claims in the US (“US Preference Claims”) against certain creditors of 3AC, including, at that stage, Digital Currency Group (“DCG”). The JLs contended that those claims had merit and were supported by the non-conflicted members of 3AC’s creditors’ committee.

By this point in time, the JLs had already obtained recognition of 3AC’s liquidation under Chapter 15 of the US Bankruptcy Code, and the US Court had expressly recognised the BVI liquidation, in the US, as the “foreign main proceedings”. However, the relevant avoidance powers that the JLs claimed to be entitled to exercise under US law were (on their own case) only available in a full Chapter 7 or 11 bankruptcy proceeding. That was due to the express terms of Chapter 15, reflecting the intention of its drafters when implementing the Model Law in the US.

Accordingly, by the Sanction Application the JLs sought permission to commence Chapter 11 proceedings in the name of the company in the US.

The Sanction Application was opposed (at that stage) by DCG on various grounds. One of DCG’s primary objections was that the Proposed Chapter 11 Proceedings would violate the common law principle of modified universalism, and in particular the central principle that there should be a single bankruptcy in which all creditors are entitled to prove. DCG’s position was that the Proposed Chapter 11 Proceedings would effectively function as its own (additional) main (or plenary) proceeding, with its own rules as to the processing and allowance of claims and the distribution of assets, etc.

After a preliminary issue as to DCG’s standing to participate in the Sanction Application was resolved in its favour, the Sanction Application was listed to be heard on 24 and 26 July 2023 before Justice Mangatal (Ag.). In advance of that hearing, both DCG and the JLs filed detailed expert evidence of US law on the Proposed Chapter 11 Proceedings.

The Court’s decision in relation to the Sanction Application was subsequently delivered orally on 26 July 2023 (the “Sanction Judgment”).

The Sanction Judgment

The Legal Principles

The Court began the Sanction Judgment by setting out the applicable test when a BVI Court is determining a “type 1” sanction application by applicant-officeholders, namely whether “in the totality of the circumstances the Court should permit the liquidator to undertake a particular course of action”: see Redhouse Holdings Limited4 per Wallbank J. Mangatal J emphasised that the Court’s considerations include not only the best interests of the estate, in the sense of its creditors, but also:

  • the reputation of the Court and the BVI insolvency regime; and
  • the duty of the Court to supervise and control its officers so that they do not act unfairly and ensure that they act in a ‘proper’ manner (the principle derived from Ex Parte James; Re Condon5).

Mangatal J stated that although the interests of the creditors are important in a sanction application (and the court will give weight to the wishes of those creditors, when uninfluenced by extraneous considerations, as good judges of where their own the best interests lie), those interests are not an overriding consideration, and will not necessarily bear significant weight where their views (in this case represented by the non-conflicted members of the creditors’ committee) are informed by a desire to receive greater returns in the liquidation: see Farnum Place LLC v Krys6 per Bannister J and the Court of Appeal.

The Court’s Decision

Ultimately Mangatal J determined that in the totality of the circumstances she would exercise her discretion to refuse the JLs’ sanction (and thereby dismissed the Sanction Application).

Although it is not the intention of this article to address all of the reasons the Learned Judge provided in support of her decision, within those “powerful reasons” were the following:

  1. That in her judgment the Proposed Chapter 11 Proceedings “cut…across the authority of the BVI court and the BVI insolvency regime in respect of a BVI-incorporated company already in liquidation in the BVI”, in circumstances where the BVI Proceedings had “already been recognised in the U.S. Chapter 15 Proceedings as main foreign proceedings”;
  2. Based on the material before her, “Chapter 11 is not designed to be and cannot be a mere add-on to a foreign main proceeding. It is, in itself, a full-blown substantive main proceeding, with its rules as to processing [and] allowance of claim[s] and the distribution of assets”;
  3. That issue could not, in her judgment, be cured by the issuance of the judicial protocols contemplated by BVI Practice Direction No.2 of 2017 (guidelines for communication and cooperation between courts in cross-border insolvency matters), as the issue was substantive in nature, rather than procedural; and
  4. It appeared to the Judge, based on the evidence before the Court, that the JLs proposed to move certain very important functions from the BVI to the US, “in particular, the allowance of the claim and proofs of debt”, and that the JLs’ proposed solution, namely a bifurcated claims/distribution structure, was “unprecedented”, “somewhat amorphous” and would, in her judgment, require creditors admitted in one jurisdiction (but not the other) to forfeit access to 3AC assets in the other jurisdiction. In her view, that approach “clearly runs directly contrary to the primacy of the BVI court as having conduct of the main proceedings and it could deprive creditors of rights…that they would have in the BVI”, and was not “a good look for officers of the BVI Court.”

Separately, Mangatal J also concluded that in her judgment the Sanction Application represented “forum shopping”, given that the JLs could in theory bring preference claims in the BVI under BVI law.

Vindication of the Common Law Principle

Although the principle itself was not referred to directly in the Sanction Judgment, it is clear, in our view, that the Judge’s reasons (at least those set out above) represent, in substance, an endorsement by the BVI Court of the principle of modified universalism, and a vindication of the importance of there being a single unitary and universal liquidation proceeding in which all creditors should (or can) prove.

The Sanction Judgment is also important more generally, for its concise restatement of the legal principles that apply in relation to “type 1” sanction applications by BVI officeholders. As indicated above, given the importance of the issues Mangatal J did grant the JLs permission to appeal the Sanction Judgment, and that appeal remains extant.

Conyers represented the Respondent, DCG, together with Sue Prevezer KC and Ben Woolgar of Brick Court Chambers, with assistance on US law matters from Weil, Gotshal & Manges LLP.

1 Cambridge Gas Transportation Corp v Official Committee of Unsecured Creditors of Navigator Holdings plc [2006] UKPC 26; [2007] 1 AC 508 per Lord Hoffmann.

2 HIH Casualty and General Insurance Ltd [2008] UKHL 21; [2008] 1 WLR 852 per Lord Hoffmann.

3 Singularis v Pwc [2015] AC 1675.

4 BVIHCM 138 of 2010 (unreported, 2 December 2020).

5 (1874) 9 Ch App 609).

6 BVIHCVAP 14 of 2013 (unreported, 10 March 2022).

This article was originally published in the BVI Arbitration Week 2024 Conference Magazine.


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