In its recent judgment in Tristan Oil Ltd v The Scheme Creditors (BVIHCM 2023/0120) the BVI Commercial Court (the Hon. Justice Paul Webster (Ag.)) has considered the question of when a party not bound by a scheme of arrangement has standing to intervene in and challenge the scheme.

Amongst other questions the Court had to consider, was what was required for a third party to demonstrate a sufficient interest for it to be heard and to object to sanction of a scheme of arrangement under the BVI Business Companies Act ("BCA").

Background

The scheme in question (the "Scheme") was between Tristan Oil Limited ("Tristan"), a BVI company, and its creditors under section 179A of the BCA. Tristan was incorporated in 2006 as a special purpose vehicle to raise finance to fund the operations of two oil and gas companies operating in Kazakhstan, members of the group of which Tristan was part. However, rather than proceeding as planned, the group alleges, the Republic of Kazakhstan ("RoK") expropriated the rights to exploit the Kazakh oilfields.

In 2010, the individuals behind the group and certain group companies (referred to together as the "Claimant Parties") – which did not include Tristan - commenced arbitration proceedings against RoK in Sweden and eventually secured a final award of approximately US$500million in damages plus interest and costs, interest continuing to run (the "Award"). The Supreme Court of Sweden rejected two attempts by Kazakhstan to set aside the Award and, at the time the Scheme was propounded, all avenues to challenge the Award in Sweden had been exhausted.

RoK, however, did not honour the Award, and the Claimant Parties launched enforcement proceedings against RoK in Sweden, Belgium, Luxembourg, Italy, the Netherlands, England and the United States of America. These proceedings are continuing and are heavily contested. These enforcement proceedings were funded via Tristan, which issued New York law-governed loan notes for the purpose (the "Original Notes"). The holders of the Original Notes ("Existing Noteholders") were amongst the creditors party to the Scheme.

Eventually, the Claimant Parties ran out of money to continue funding the litigation to enforce the Award. Tristan therefore proposed to take steps to raise additional funds from investors to continue the execution proceedings. Amongst other things, this required the rights of the Existing Noteholders to be restructured via a scheme of arrangement, so as to enable the new funding to be given first priority on payments from in the event that recoveries were made on the Award.

For this purpose, Tristan proposed a scheme of arrangement with its creditors. In August 2023, Tristan secured an order from the Court convening a meeting of creditors and, at the scheme meeting, held in early October 2023, the Scheme was approved by a majority of creditors representing 81.8% in value of the creditors present and voting. The Scheme was then brought back to the Court for sanction and was sanctioned by the Court on 1 November 2023. In due course, the Sanction Order was duly filed with the Registrar of Companies as required by the BCA and came into effect. The Scheme was subsequently recognised in the United States under Chapter 15 of the United States Bankruptcy Code.

Following sanction, and the filing of the sanction order, RoK, with the National Bank of Kazakhstan (with RoK, the "Kazakh parties") filed separate applications in the now completed scheme proceedings seeking, amongst other things, a declaration that they were interested parties for the purpose of the scheme, an order joining them as parties to the scheme proceedings and an Order setting aside the Sanction Order. The Kazakh parties had the benefit of certain money judgments against the Claimant Parties made by the English Courts and had obtained ex parte orders in the BVI registering the judgments as judgments of the BVI Court (“the Registered Judgments”).

The basis on which the Kazakh Parties claimed to be interested parties for the purposes of the scheme was (1) that the Scheme would provide Tristan with funds that will be used to finance the continued execution proceedings to collect the Award which the Kazakh Parties alleged was obtained by fraud, and (2) that the changed waterfall of repayments means that the Claimant Parties will receive less which would prejudice the Kazakh Parties ability to execute the Registered Judgments against the Claimant Parties.

The Court's findings

The key finding of the Court was that the Kazakh Parties did not have a relevant interest in the Scheme which would allow them to declared an interested party. Having reviewed the English caselaw on the rights of third parties to heard on a scheme, including, in particular, Re Lamo Holdings BV [2023] EWHC 1558, the BVI Judge defined a "relevant interest" for this purpose as meaning "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".

While the Kazakh Parties certainly might have preferred as a practical matter that the group did not have funds to continue the execution process against them, the Judge held that RoK did not have a right not to be pursued for recovery of the amount due under the Award, whether or not the Award was obtained by fraud. The Kazakh Parties would be entitled to pursue the issue of fraud, as they it had been doing, in the various execution proceedings. Conversely, Tristan and its creditors would be prejudiced by an inability to pursue the execution proceedings due to lack of funds were sanction to be set aside, which would mean that the prospects of collecting the amounts due under an Award which was final and unimpeachable in the jurisdiction of its seat would be at an end.

In relation to the second point which the Kazakh Parties relied on as founding their interest, that the implementation of the Scheme was likely to result in the Claimant Parties receiving less from Tristan in the new waterfall of repayments, the Judge held that that was not a matter that would cause a court to withhold sanction of the Scheme. The Judge noted that the Scheme was an arrangement between Tristan and its creditors. Neither Kazakh Party was a creditor of Tristan. Their rights were against the Claimant Parties, as contained in the Registered Judgments. The Scheme did not affect those rights. Accordingly, even if a consequence of the Scheme might be that the Claimant Parties may receive less under the new waterfall as compared with the old, that was not a sufficiently proximate event which would cause the Court to withhold sanction of the Scheme.

Conclusion

This decision helpfully underlines that in the BVI, as in England, while the Court had a discretion to hear objections from third parties to a proposed scheme on the sanction hearing, this does not mean that the court has some sort of roving commission to override the wishes of the company as approved by its creditors. To be an "interested party", with a claim to be heard on and object to a scheme, a third party must have an interest that that would be affected by the Scheme itself, or the implementation thereof, and one which is sufficient for a court to say that the Scheme should not be sanctioned. Not every party that may have a practical reason to prefer that a refinancing effected by a scheme did not take place will be an "interested party" in the relevant sense.

Representation

Walkers (Rosalind Nicholson, Iain Tucker, Renell Benjamin and McKay Drigo) acted for Tristan.

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