At first instance, the Commercial Court refused BEC's application to set aside a statutory demand issued by certain creditors in respect of a debt owed by BEC and its wholly owned subsidiary as a result of a costs award in arbitration proceedings before the London Court of International Arbitration. BEC appealed to the Court of Appeal without seeking leave and in response, the creditors applied to strike out BEC's appeal as being a nullity on the ground that the order was interlocutory and leave was required to appeal it. It was not disputed that if leave was indeed required, BEC's appeal would be liable to be set aside as a nullity.
The creditors argued that an order arising out of an application to set aside a statutory demand is an "intermediary question" in the procedure to wind up the company and therefore interlocutory.
In assessing whether the order was final or interlocutory, the Court of Appeal applied the well-known "application test" as set out at Rule 62.1(3)(b) of the Eastern Caribbean Civil Procedure Rules and explained in Oliver McDonna v Benjamin Wilson Richardson: an order or judgment is final if it would be determinative of the issues that arise on a claim, whichever way the application could have been decided.
The Court of Appeal considered that an application to set aside a statutory demand was not a claim in the true sense as it is not determinative of any rights or obligations of the parties to the claim and does not result in an enforceable order; it is instead sui generis (or "of its own kind") and is not governed by the principles relating to orders that are a prerequisite to filing substantive proceedings. It is simply a mechanism by which a creditor can obtain an order as to the company's deemed insolvency based on the unpaid debt in question, and nothing more.
The Court of Appeal also held that although a statutory demand is usually issued with a view to commencing liquidation proceedings, it is not a prerequisite and a creditor can apply to appoint liquidators on any of the alternative grounds of insolvency set out in the BVI Insolvency Act, with or without the aid of an unsatisfied statutory demand. In other words, a creditor can either issue a statutory demand and proceed to winding up proceedings regardless of the outcome of any application to set aside the statutory demand or it can proceed directly to apply to wind up the company and prove its case that the company is insolvent at that stage. Accordingly, a statutory demand and any application to set it aside is a standalone process and not a procedural "intermediary" step in the winding up of a company. The resulting order was therefore final, and not interlocutory.
The Court of Appeal also confirmed that where a ground on an application to set aside a statutory demand has been fully ventilated, the debtor company cannot resurrect the same ground in the subsequent winding up proceedings for the purposes of opposing them on the basis of the issue estoppel principle. Conversely, if a company elects not to apply to set aside a statutory demand, it is not precluded from disputing the debt at the hearing of the winding up application. This is a welcome clarification in light of previous authorities in the jurisdiction that suggested that the statutory demand procedure was not truly optional.
Further, BEC applied for a stay of the order dismissing the application to set aside the statutory demand. The stay application was advanced on the basis that if the order were not stayed, the appointment of liquidators would have had disastrous consequences, namely that (i) it would have constituted a change of control of the company thereby giving a third party certain rights, entitling it to take over the interests of BEC's subsidiary in certain lucrative oil contracts; and (ii) the appointment of liquidators, who would likely have taken over the running of the company and its subsidiary, would have caused significant operational losses.
When considering the stay application, the Court of Appeal held that because the order was declaratory in nature and did not create any enforceable rights, it was not capable of being stayed. This is notwithstanding the fact that the order authorised the creditors to apply for the appointment of liquidators over the company, which the Court of Appeal considered simply gave the creditors an option to proceed with a winding up petition, without insisting that it be done. In the circumstances, the Court of Appeal considered that the more appropriate course of action would have been for the company to apply for an injunction to restrain the creditors from exercising their right to apply to wind up the company.
Although the stay application was refused, the Court indicated that all was not lost for the company. The court retained a wide discretion as to whether or not to make an order appointing liquidators, even if the grounds upon which the court could appoint liquidators have been made out. As such, the company could still raise issues relating to the effects of the appointment of liquidators at the hearing of any ensuing winding up application.
This decision confirms that an order resulting from an application to set aside a statutory demand is final and no leave is required to appeal it. This is an exceedingly welcome clarification in circumstances where the intended appellant would have had to proceed on both the 'final' and 'interlocutory' basis before the Court of Appeal so as not to prejudice its position in the event one of those routes was ultimately determined to be inappropriate. Additionally, a statutory demand is not a prerequisite to an application to appoint liquidators as the latter can be made on alternative grounds whether or not the statutory demand is set aside. Finally, even if, in principle, it is not possible to obtain a stay of the relevant order dismissing the application to set aside a statutory demand, a prohibitory injunction may be applied for in appropriate circumstances and, in any event, a company may be able to resist a winding up application on exceptional grounds given the Court's wide discretion not to put a company into liquidation even in circumstances where the requisite test is satisfied.
Harneys acted for the successful party, BEC Limited.
This article was first published on mondaq.com.