The rapid spread of the novel coronavirus (COVID-19) and the measures put in place by national governments to contain it are having profound and swift global economic impact.

Many businesses which appeared financially healthy just a few weeks ago now face severe stress and, while many will recover strongly, others will inevitably fail.

In that almost unprecedented context, it is critically important that directors of BVI companies understand their obligations under BVI law where a company is in financial difficulty, and are aware of the measures they can take to mitigate the risks.

One of the key lessons of past recessions has been that companies that make painful decisions decisively having taken expert advice sooner rather than later tend to have a greater range of options and a better chance at recovery.

Key takeaways

A BVI company may be insolvent on a cash flow or balance sheet basis.

Directors of an insolvent BVI company owe their duties to maximize value for the creditors, rather than the shareholders.

Insolvent trading concerns arise if a BVI company continues trading despite having no reasonable prospect of avoiding liquidation.

In some circumstances, directors could face personal liability.

There are sensible precautions and mitigating measures directors can take now to help protect themselves against future claims by creditors or liquidators.

There are a range of insolvency and restructuring tools under BVI law, but there is no "debtor in possession" procedure under BVI law equivalent to Chapter II in the US and no equivalent to the administration process under UK law.

Insolvency under BVI law

A BVI company is considered insolvent if it:

1. is unable to pay its debts as they fall due (cash flow insolvency); or

2. if the value of its liabilities exceeds the values of its assets (balance sheet insolvency); or

3. fails to comply with a valid statutory demand, or a judgement or order of a BVI court against the company is returned wholly or partly unsatisfied (technical or deemed insolvency).

Cash flow insolvency is likely to be a particular issue for many companies right now, as they may have a relatively healthy balance sheet but have seen a significant decrease in cash in, whilst their obligations to their creditors remain unchanged.

Director duties and misfeasance

Directors of a BVI company owe various statutory and fiduciary duties to the company (summarised more fully here). The court has broad powers to order a director (or other officer) of a company in liquidation to pay compensation to the company where the director "has been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company".

When a company is insolvent, or close to it, the directors must act in the best interests of the creditors of the company (rather than the company itself). Case law has suggested different triggers for the point at which directors should start to consider the best interests of creditors, varying from (i) when the company is near to, or in the vicinity of, insolvency, (ii) when there is doubtful solvency, or a risk of insolvency, or (iii) wherever there is financial instability.

Regardless of the exact point at which a director is strictly required to specifically consider the interests of creditors, a prudent director (taking into account their general duty to exercise reasonable care and skill) who faces financial difficulty should probably begin to consider at an early stage what actions can be taken to resolve or mitigate the issue, whether there is a prospect of recovery, whether there is a need to take legal advice, and whether or not formal insolvency proceedings are warranted.

Insolvent trading

Insolvent trading is, in essence, a means for allowing the courts to force directors to contribute to the company where their decision to try and keep the company running caused creditors a greater loss than if they had proceeded immediately with insolvency proceedings. In the current extraordin...