BVI Court Rejects “Improper Purpose” Argument in Application to Dismiss Legal Claim – Insolvency/Bankruptcy/Restructuring


British Virgin Islands: BVI court rejects ‘unlawful purpose’ argument in request to quash legal claim

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In the recent judgment of the ECSC in the matter of Sumner Group Mining Limited v Zica SA (BVIHC (Com) 2020/0171, Walkers successfully represented the respondent in the defense of an application to dismiss a legal claim. Jack J provided helpful advice on legal principles in circumstances where he is alleged that a legal demand was improperly served for a collateral purpose.

The plaintiff requested the cancellation of a legal claim on the basis of either:

  1. there was a substantial dispute as to the debt owing (pursuant to section 157(1) of the Insolvency Act 2003); or

  2. in the alternative, that substantial injustice would be caused “for some other reason” (pursuant to Section 157(2)(b) of the Insolvency Act

The plaintiff argued that the same considerations apply to overriding a statutory requirement of the Court’s ability to decline to appoint a liquidator where the appointment is not made for a legitimate purpose.

This case, we believe, is the first decision where the Court has held that it is not open to a party to raise issues of alleged improper purpose when seeking to quash a legal claim. The judge held that the proper place to consider issues of unfair subject matter is the substantive hearing for the appointment of a liquidator, during which the court can take into account the interests of all creditors and make the rounds necessary horizon.

The judge further noted that, in considering issues of improper purpose, he doubted that the well-known Sparkasse Bregenz test – that the debtor seeking to resist insolvency proceedings honestly believed, on objectively more than merely frivolous grounds, that there was reason not to pay an alleged debt, so that the Court saw that there was a question to be decided – was the appropriate touchstone. The judge noted that when a debt is disputed on substantial grounds, the creditor can bring an ordinary court action to establish it and at that point the creditor will have to establish their case on a balance of probabilities. But no alternative procedure is available if an improper purpose defense is invoked. The hearings of the insolvency proceedings are the only place where these matters would be considered. Therefore, it appeared to the judge that improper purpose should be considered on the balance of probabilities standard in insolvency hearings. This higher standard of proof, going beyond a quick and sketchy basis, and the fact that establishing improper purpose can raise difficult questions of fact, is another reason why the judge held that these matters were to be reserved for liquidation proceedings on the merits. , and why Section 157(2)(b) of the Insolvency Act should not be read as intended to cover such cases.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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