You Shall Not Pass: BVI Commercial Court Dismisses Third Party Attempt to Unravel Sanctioned Scheme of Arrangement
Jomokie Phillips and Mark Goodman of Campbells examine the dismissal by the BVI Commercial Court of attempts by the Republic of Kazakhstan and the National Bank of Kazakhstan to challenge a previously sanctioned scheme of arrangement involving Tristan Oil. They focus on the legal arguments and decisions regarding the standing of third parties in such cases, underlining the court’s strict criteria for interfering with sanctioned arrangements.
Tristan Oil (Tristan) was formed in 2006 as a special purpose vehicle to secure financing for the operations of two oil companies in Kazakhstan. These two oil companies provided guarantees to Tristan which then issued notes to various investors and subsequently raised approximately USD531 million. The rights of the guaranteeing companies and Tristan itself were then expropriated by the Kazakhstan government.
Tristan then commenced arbitration proceedings against Kazakhstan in Sweden to obtain compensation. An award of USD500 million (the Award) was obtained against Kazakhstan, following which Tristan initiated enforcement proceedings in various jurisdictions. These enforcement proceedings came to a halt due to a lack of funding. Tristian opted to restructure its debt by way of a BVI scheme of arrangement (the Scheme) in order to raise new funds to continue the enforcement process.
Scheme of Arrangement and Court Proceedings
Section 179A of the BVI Business Companies Act (the Act) governs schemes of arrangement in the BVI. This procedure requires the company, as a first step, to seek the approval of the BVI court to convene a meeting of its creditors to consider and, if thought fit, approve the scheme with at least a majority of 75% of the creditors present and voting. The meetings are then held on the terms and conditions imposed (if any) by the BVI Court following which, if the Scheme is approved with the requisite majority, the BVI Court considers whether the scheme should be given final sanction.
Tristian obtained the approval of the BVI Court to convene a meeting of its creditors to consider the Scheme. The Scheme was approved with the requisite majority. Following the withdrawal of objection by the sole dissenting creditor, final sanction of the Scheme was granted by the BVI Court on 1 November 2023 (the Sanction Order).
Having been granted final sanction, Tristan obtained Chapter 15 recognition in the United States. It implemented the terms of the Scheme and entered into arrangements with new investors to obtain the necessary funds to continue the enforcement of the Award.
Challenges and Rulings on Third Party Objections
On 7 December 2023, a month after the Scheme had been given final sanction, an application was filed by the Republic of Kazakhstan (Kazakhstan) to set aside the Sanction Order. Kazakhstan sought a declaration that it was an interested party for the purposes of the Scheme and that it was entitled to be served with the Sanction Order. It also sought orders joining it as a party and for the seal placed on the proceedings to be lifted. A similar application was made by National Bank of Kazakhstan (the Bank) on 8 January 2024.
This article only addresses whether Kazakhstan and the Bank were properly interested parties whose objections justified the setting aside of the Sanction Order.
At the outset, Kazakhstan and the Bank conceded that they were not Tristan’s creditors and were not entitled to participate in the Scheme meeting or to vote on the Scheme. However, they contended that they were interested persons since (i) the Award had been obtained by fraud and (ii) the purpose of the Scheme was to provide further financial support to Tristan to “harass” Kazakhstan into satisfying the Award.
They also alleged that they would be prejudiced in enforcing certain money judgments obtained by them against Tristan. These judgments had been registered in the BVI and were subject to a set aside application.
The BVI Court noted that the Act does not define who is an interested person for the purposes of a scheme of arrangement. The BVI Court noted that this determination is usually made at the sanction stage where the court may allow third parties to be heard so as to determine the question of their standing. It is therefore a question of fact that had to be proved by the party seeking to be recognised as an interested party. Two English authorities were relied on to make the point that third parties are required to voice their objections to the scheme timeously and in any event, before the scheme is sanctioned.
“The case provides a good benchmark as to how the BVI courts may deal with such challenges.”
The BVI Court dismissed Kazakhstan and the Bank’s applications for a number of reasons, including the following:
- The objections were brought after the Scheme had been sanctioned by the BVI Court. No authority had been provided to the judge to show that such objections could be entertained at this late stage.
- The Sanction Order was a final order which could only be set aside on appeal or on the basis of fraud in separate action. The BVI Court had no inherent jurisdiction to set aside its own final order otherwise.
- Kazakhstan and the Bank did not have a relevant interest in the Scheme. The term “relevant interest” was said to mean an interest that would be affected by the Scheme or the implementation of the Scheme in a way that provides a genuine basis for the refusal of sanction.
- The purpose of the Scheme in raising funds to pursue the enforcement of the Award was not itself improper since the Award was final and unimpeachable and Kazakhstan’s arguments as to fraud had previously been rejected by multiple courts. In any event, those arguments could be pursued in the execution proceedings.
- The fact that Kazakhstan and the Bank were judgment creditors did not provide a reason as to why sanction of the Scheme should be withheld. Their rights as judgment creditors were not affected by the Scheme and the fact that the Scheme impacted the recoverability of those judgments would not, in any event, have constituted proper grounds on which the BVI Court could have withheld sanction.
This is the first recorded case in the BVI which expressly deals with the rights of third parties to challenge a scheme of arrangement that has been sanctioned. It provides a good benchmark as to how the BVI courts are likely to deal with such challenges and the relevant test that would apply.
The following points are noteworthy:
- Third parties who intend to object to a scheme of arrangement must act speedily in order for the court to consider their objections. They must act before the scheme has been sanctioned as once sanction has been given, there is very limited scope for review by the court.
- In addition to acting timeously, they must ensure that they are actually affected by the terms or implementation of the scheme. This is a question of fact that must be proved by cogent evidence.
- A non-creditor has an extremely high threshold to reach in persuading the court that its rights are affected by a scheme. It must be able to point to a sufficiently proximate event which would cause the court to withhold sanction. Again, this is a question of fact that can only be properly answered by solid evidence.
Campbells
