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companies (local BVI companies were regulated by a separate Companies Act) and it will continue to apply until it is superseded by the BVIBC on Jan. 1, 2007.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.