They’re a fast-moving set, the legislators in the British Virgin Islands … a completely new company law statute–the BVI Business Companies Act 2004 (BVIBC)–has been passed, in double quick time, despite the rival attractions of sun, sea and sand. So what’s it all about?
The BVI moved quickly during autumn 2004 to address the perceived anomaly of ring-fencing of non-BVI businesses for tax purposes, a concept to which the European Union had taken exception in its Code of Conduct on Business Taxation. BVI businesses were subject to local tax, whereas the hundreds of thousands of BVI international business companies (IBCs) were exempt. This was a difference that could not continue–hence the BVIBC was introduced, alongside changes to BVI tax law, to remove this distinction.
At the same time, the BVI government decided to update its corporate legislation, all part of the accelerating movement toward making its laws more sophisticated, modern, flexible, creditor-friendly and hence internationally acceptable. The BVIBC has followed hard on the heels of the Insolvency Act 2003, the Virgin Islands Special Trusts Act 2003 and, in previous years, the founding of an independent financial services regulator (the Financial Services Commission), together with mutual funds and insurance legislation.
The BVIBC will regulate all companies incorporated in the BVI from 2007, including the 600,000 or so IBCs currently in existence and formed under the International Business Companies Act. The IBC Act was, until the BVIBC came along, the principal corporate statute for BVI companies (local BVI companies were regulated by a separate Companies Act) and it will continue to apply until it is superseded by the BVIBC on Jan. 1, 2007.
This two-year transitional period for full implementation of the BVIBC is designed to enable any problems to be resolved by further legislation contemplated later this year.
So for two more years, IBCs can continue to operate under the IBC Act as before. On Jan. 1, 2007, however, if they haven’t already jumped–that is, re-registered voluntarily under the BVIBC–they will be pushed by an automatic re-registration. New companies can be set up under either the BVIBC or the IBC Act for the rest of 2005. But beginning Jan. 1, 2006, new companies can only be formed under the BVIBC.
So how is the BVIBC different from, and better than, the IBC Act? In most cases, the BVIBC follows the tried and tested–and successful–formula of the IBC Act. However, several additional features can be highlighted:
1. Types of Company
Under the IBC Act, a company can only be incorporated as a company limited by shares. The BVIBC allows for companies limited by guarantee (with or without a share capital); unlimited companies (with or without a share capital); segregated portfolio companies (SPCs); and SPVs, or restricted objects companies. The latter two deserve further mention.
SPCs first came into the BVI with the Insurance Act 1994. Regarded as a success, the idea is to enable mutual funds and other types of companies to use the concept and hence enhance the BVI’s ability to compete for offshore business with other jurisdictions such as the Cayman Islands. SPCs can now be set up, with FSC approval, to have segregated portfolios–one legal entity but separate pools of assets (and related liabilities)–particularly advantageous as a vehicle for multi-class mutual funds.
Companies with restricted objects, or SPVs, are a new vehicle, aimed at attracting more securitization business to the BVI. A company can be incorporated with restricted objects, the aim presumably being for the company not to be able to conduct business outside those objects. This concept brings back happy (umm…) memories of those 19th century English railway company cases on ultra vires–but, following the preferred approach of rating agencies, the BVIBC has pulled back from this, providing in Section 28 that a company regulated by the Act has full capacity to do any act and carry on any business. Section 29 goes a step further, stating that no act will be invalid for lack of capacity. So what is the consequence if an SPV exceeds its restricted objects? Sections 28 and 29 are quite clear, so whilst there is no ultra vires act, the likelihood is that the directors will be in breach of their duty in failing to ensure that the company complies with the terms of the memorandum.
2. Share Capital
Unlike with the IBC Act, the BVIBC has no concept of authorized capital or share capital. The only requirement now is that the memorandum of a company that is authorized to issue shares must state the maximum number of shares it is authorized to issue. The remaining provisions concerning capital are now contained in the rules on purchase by a company of its own shares and those relating to the alteration of the memorandum.
3. Joint Venture Companies
The BVIBC has slightly expanded provisions governing changes to the memorandum or articles of association compared to those of its predecessor. These could be quite useful for joint venture companies. So, for example, Section 12(2) now specifically permits a memorandum to include provisions stating that specified provisions of the memorandum or articles cannot be changed or can only be changed if specified conditions are met.
4. Registration of Charges
Of particular relevance to lenders, the BVIBC has a new regime for registration of mortgages. No longer will registration be effected by an entry in a company’s own register of mortgages. From now on, for companies governed by the BVIBC, registration is made at the BVI Companies Registry. Registration still is voluntary and there is no time limit for filing, unlike in other jurisdictions, but the date of registration will govern priority of security. Secured lenders can now file their security documents themselves, as well, instead of trusting to the borrower or its lawyer or agent to do it.
5. Directors’ Duties
An interesting innovation has been introduced to address the potential conflicts of interest that directors of subsidiaries or joint venture companies face when their shareholders’ interests diverge from the company’s own interests. If the memorandum or articles permit, a director of a subsidiary can act in accordance with what he believes are the holding company’s best interests, even though it may not be in the best interests of the subsidiary. If the subsidiary is not wholly owned, prior agreement of the shareholders other than the holding company also is needed. Similarly, if the memorandum or articles so permit, where the company is carrying out a joint venture between the shareholders, the director can act in a manner he believes is in the best interests of one or more members, even if it may not be in the company’s best interests.
The director’s obligation to exercise skill and care also has been amplified, so that now the director must exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances (the IBC Act refers only to the standard of a reasonably prudent person in comparable circumstances). The nature of the company and of the decision, the director’s position and the nature of his responsibilities also must be taken into account.
The IBC Act provides that dividends can only be paid out of surplus, a concept probably unfamiliar to English lawyers accustomed to distributable profits tests. In addition, to pay a dividend, the company has to be solvent on both a cash flow and balance sheet basis.
Broadly, surplus is defined as the excess of (i) a company’s assets over (ii) its liabilities plus capital, with the added quirk that the directors can re-categorize capital as surplus if the company is solvent on both a cash flow and balance sheet basis.
From this, one can see that the requirement for surplus overlaps, and appears to duplicate unnecessarily, the solvency test.
This peculiarity of the IBC Act was avoided completely in the BVIBC, which only has a solvency test for the payment of dividends and no concept of surplus. Directors can authorize a distribution if they are satisfied on reasonable grounds that the company will, immediately after the distribution, satisfy the solvency test; the directors’ opinion has to be contained in the resolution concerned.
The IBC Act has had a very successful life. With its added elements and some fine-tuning before 2007, its successor, the BVIBC, should provide a sound framework for BVI business for the future whilst satisfying international requirements and expectations.
Stephen Pollard is an associate in the London office of Conyers, Dill & Pearman, focusing on British Virgin Islands legal matters
This article is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information.
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