Tristan Oil Ltd v The Scheme Creditors (BVIHCM 0120/2023, 19 March 2024): Who is entitled to intervene in and challenge an approved scheme of arrangement? Justice Webster (Ag.) of the BVI Commercial Court considers what is meant by an “interested” party for the purposes of a scheme of arrangement.
The Facts – shortly stated
A scheme of arrangement had been sanctioned between the Company and its creditors (“Scheme”). The Republic of Kazakhstan (“Kazakhstan”) applied to “be declared an interested party for the purposes of” the Scheme and thereby be joined and, eventually, set aside the Scheme. The National Bank of Kazakhstan (“Bank”) filed a similar application to seek the same relief subsequently.
Kazakhstan had been ordered to pay damages etc. in favour of the Company’s sole shareholder (“Mr. Stati”) and, inter alios, his son in an arbitration commenced by the latter (“Claimant Parties”). This had resulted in a final order which cannot be challenged in its seat of arbitration (Sweden) (“Award”).
In resisting enforcement proceedings commenced across multiple jurisdictions, Kazakhstan maintained that the Award was obtained by fraud and should not be recognised or executed.
The Claimant Parties ran out of money to fund the ongoing enforcement efforts and therefore sought to raise additional funds by way of the Scheme. The new investors advanced funds to the Company and thereby became the Company’s senior creditors. The funds were used to pay past and future expenses of the execution proceedings.
Is Kazakhstan and/or the Bank “interested parties”?
Neither applicant is a creditor.
But they claim to be affected in that (1) the Award was obtained by fraud and funds generated by the Scheme will be used by the Company to harass Kazakhstan; and that (2) the Claimant Parties, against whom Kazakhstan and NBK have registered judgments, will occupy a lower position on the waterfall of payments by the Company [16].
At [20], the Court first confirms that there is “no doubt that the Court has a discretion on the hearing of a section 179A sanction application to hear objections from third parties to the proposed scheme”.
But the Court went on to caution that a scheme is “a matter between a company and its creditors, and the Court should exercise its discretion carefully to allow third parties to object to the scheme and, a fortiori, to rely on third-party objections to refuse sanction. This is particularly true when the objectors have alternative avenues for voicing their objections. The Court does not have a roving commission to override the wishes of the company as approved by its creditors”.
The Judge noted three obstacles to the application.
- There is no authority to suggest that the Court may entertain objections of third parties afterthe scheme had been sanctioned. This is because “the Court has a very limited power to reopen a scheme that has been sanctioned under section 179A of the BC Act” [23].
- It follows from the above that the order sanctioning the Scheme has become a “final order of the Court, and this Court does not have power to set aside its own final orders” [24].The proper route is to appeal to the Court of Appeal or file a fresh action claiming that the order sanctioning the Scheme was procured by fraud. It cannot be revisited or amended simply by alleging a change of circumstances.
- In any event, Kazakhstan does not have a relevant interest in the Scheme.
On the third point, the Court elaborates that a “relevant interest” means “an interest that would be affected by the Scheme itself, or the implementation thereof, in a way that is sufficient for a court to say that the Scheme should not be sanctioned”. Accordingly, on the two bases for asserting interest, the Court concluded that (1) Kazakhstan “does not have a right not to be pursued for the recovery of the amount due under the Award, whether or not the Award was obtained by fraud” [28]; and (2) that the Claimant Parties receiving less from the Company is not a matter of concern: the Applicants’ rights against the Claimant Parties are “not affected by the Scheme or its implementation. The fact that the Claimant Parties may have less assets against which the Registered Judgments can be enforced is not a sufficiently proximate event which would cause the Court to withhold sanction of the Scheme” [29].
Key Takeaways
Whilst the facts are somewhat unique, the authority serves as a useful reminder of the following:-
- Act Early: do not sit and wait until after the scheme has been sanctioned. Be sure to intervene early if it is genuinely considered that a third party possesses a relevant interest.
- Ensure Sufficient Proximity: a scheme is a matter between the company and its creditors. Therefore, the purported interest of a third party must be sufficiently proximate to the sanction decision. It would not seem to suffice for the third party to say that their rights vis-à-vis a creditor of the company will be affected, in that the creditor will end up having less assets against which the third party may take enforcement action.
