Nick Egan and Omonike Robinson-Pickering of Walkers assess the options and framework for parties raising capital in the British Virgin Islands
Section 1 – Bank licences
1.1 What licences or approvals do lenders need to have if lending to a borrower in this jurisdiction if a) the lender is a bank or b) the lender is a not a bank?
Generally, no banking licences or approvals will be needed by foreign lenders proposing to lend to British Virgin Islands (BVI) companies. This is the case whether the lender is a bank or not.
The two main exceptions are lending to BVI government bodies and certain types of secured lending involving regulated entities in the BVI. However, in most lending transactions, these exceptions would not be applicable.
1.2 Are any exemptions available and/or are any techniques typically used to structure around such requirements?
Section 2 – Security interests
2.1 Can security be taken over the following asset classes and what documentation or formalities are required to create, perfect and maintain such security?
b) bank accounts
d) contractual rights
e) insurance policies
f) real property
g) plant and machinery
h) intellectual property
i) debt securities
j) future/after acquired property
k) floating charges over all assets
Yes, security can be granted over each of the assets listed above.
In relation to shares in a BVI company, security would usually be taken by way of an equitable share mortgage or a fixed charge which, once signed and delivered by the relevant parties, will be sufficient to create the security. It is advisable to place a notation on the relevant company's register of members evidencing the existence of the security. A copy of the annotated register of members can be publicly filed with the Registry of Corporate Affairs in the BVI (Registry) and thereby recorded on the company's public corporate records. These steps will provide actual notice to third parties of the existence of the security if they review the register of members or carry out a company search of the company, although the annotation of the register of members and its filing with the Registry do not constitute automatic or constructive notice to third parties of the security.
The assets listed in b)-k) owned by a BVI company will generally be situated in a foreign jurisdiction or governed by foreign law, with the result that in most cases the law of the foreign jurisdiction where the asset is situated, its foreign governing law or the law of the loan agreement will be the most appropriate law to govern the security. The creation, perfection and maintenance of such security will therefore usually be a matter of such foreign governing law.
As a general rule, there are no perfection requirements necessary under BVI law to recognise the validity or enforceability of security created by BVI companies. Once the security document has been duly executed and delivered, the security which has been granted will be valid as a matter of BVI law.
In the very rare case of BVI law-governed security being taken over by bank accounts, receivables, contractual rights and insurance policies, it is advisable that notice of the security be given to the relevant bank, counterparty or insurance provider (and that such insurance bank, counterparty or insurance provider acknowledges the notice).
In the unusual circumstances of a BVI company having an interest in real property located in the BVI, a legal mortgage over land would be the most common form of security document.
With respect to assets other than shares and real property, if those assets happen (unusually) to be located in the BVI, then they would typically be secured by a fixed and floating charge or an assignment.
2.2 Highlight any issues with securing obligations that may arise in the future.
Issues may arise with respect to the priority of security in certain circumstances involving future obligations.
Specifically, a mortgage or charge over certain assets of a BVI company (encumbered assets) which secures all obligations owed by such company (first security) will not necessarily rank in priority to a mortgage or charge over the encumbered assets which is later granted by such company to, or in favour of, another person (later security). Where the beneficiary of the first security has made a further advance to the company at a time when it has notice of the later security, the first security may rank behind the later security in respect of such further advance.
2.3 Can a universal security agreement be used to grant security over all assets in this jurisdiction?
Yes. However, a BVI company will rarely have assets within the BVI. For that reason, it is generally more appropriate for a universal security agreement entered into by a BVI company as security provider to be governed by the law of the jurisdictions where the assets are situated or the law of the loan agreement.
2.4 Can security be granted for the benefit of different classes of creditors under the same security agreement and if so, are there any issues that creditors should be aware of in adopting this approach?
Yes. However, except in the case of security over shares in a BVI company, security given by a BVI company will typically be governed by foreign law. This will usually be a matter for the governing law of the relevant security document. Even where BVI law governed security is taken over shares, where the security is given in favour of different classes of creditors, the share security will typically be given in favour of a security trustee with the rights of the different classes regulated by a foreign law governed intercreditor agreement.
2.5 Can security trustee or security agent structures be used in this jurisdiction to secure obligations that are owed to fluctuating creditor classes?
Yes, although in practice for the reasons stated above these will likely in practice be issues of the relevant foreign governing law of the documents.
2.6 Briefly outline any issues to consider when transferring loans and accompanying security interests between lenders.
If any variation is made to the terms of security registered against a BVI company as described in question 2.8, amendments to the registrations should be made. The process to transfer loans and security interests will be as set out in the transaction documentation and governed by the laws of that documentation.
2.7 Can security be granted by third parties? Are there any rights of contribution, subrogation or similar that might arise as a result of granting/enforcing third party security that ought to be/can be waived?
Yes, BVI law specifically provides that a BVI company may give security in relation to the liabilities of another person. Rights of contribution or subrogation under any BVI law governed security agreement can arise but can be waived under the provisions of the relevant document.
2.8 Briefly outline the registration requirements, if any, applicable to security interests created in this jurisdiction, including considerations such as the timing, expense and the consequences of non-registration.
A BVI company must keep a private register of all relevant charges created by such company, either at the company's registered office, or at the company's registered agent's office. This should be done immediately after the company has granted the security. If a company fails to keep the register, it is committing an offence and is liable on summary conviction to a fine of $5,000.
To protect a lender or agent's security and ensure they are conferred with priority against unsecured creditors and subsequent secured creditors, the lender or agent has the option to make an application to the Registry to register the particulars of a security interest created by a BVI company. Following approval of the application, the particulars of the charge are placed on the BVI company's corporate records at the Registry to put third parties on automatic constructive notice of the existence of the security interest.
Failure to file at the Registry could lead to a subsequently-created security over the same asset taking priority under BVI law over the previously-created security if the later created security is filed at the Registry.
There is no specified time limit within which this filing must be made, but it should be filed as soon as possible after creation of the security, since priority is established based on the date of the filing not the date of creation of the security.
2.9 Briefly outline any regulatory or similar consents that are required to create security (other than board/shareholder approvals).
There are no applicable BVI regulatory or similar consents (other than in the very rare instances where lending is to BVI government bodies or involves regulated entities in the BVI).
Section 3 – Guarantees
3.1 Briefly explain the downstream, upstream and cross-stream guarantees available, with reference to any particular restrictions or limitations.
Guarantees given by BVI companies may be downstream, upstream or cross-stream in nature. BVI companies commonly enter into guarantees and other non-beneficial arrangements as part of financial structuring. There are no particular restrictions or limitations on the giving of such guarantees. The giving of such guarantees is governed by the BVI Business Companies Act, 2004 as amended (BVI BC Act) and the company's memorandum and articles of association. The BVI BC Act expressly provides that, subject to its memorandum and articles, a BVI company has the power to guarantee a liability or obligation of any person and secure any of its obligations by mortgage, pledge or other charge, of any of its assets for that purpose.
The BVI BC Act also provides that a BVI company can, subject to its memorandum and articles, do any act or enter into any transaction irrespective of corporate benefit. It also provides specifically that a BVI company may give financial assistance in connection to the acquisition of its own shares.
3.2 What regulatory or other consents are required to grant downstream, upstream and cross-stream guarantees (other than board/shareholder approvals)?
Other than board or shareholder approvals, no regulatory or other consents are required to grant downstream, upstream and cross-stream guarantees.
3.3 Briefly outline any enforceability concerns associated with the granting of downstream, upstream and cross-stream guarantees that lenders should be aware of (eg any exchange controls or similar obstacles).
There is no exchange control legislation under BVI law, and no similar obstacles that lenders should be aware of in connection with the enforceability of downstream, upstream and cross-stream guarantees.
Section 4 – Enforcement
4.1 Do the local courts generally recognise and enforce foreign-law governed contracts?
Yes, if it is valid, binding and enforceable as a matter of its governing law (and assuming it does not offend public policy in the BVI), the BVI court would recognise and enforce a foreign-law governed contract.
4.2 Will the local courts generally recognise and enforce a foreign judgment that is given against a domestic company in foreign courts (particularly the New York or English courts) without re-examining the merits of the decision?
Yes. Generally, a foreign judgment may be enforced by the BVI court if all of the following apply: (a) the judgment is directed towards a particular person or entity; (ii) the foreign court had jurisdiction over the party against whom the claimant is attempting to enforce the judgment; (iii) the judgment is not impeachable under the relevant common law rules, for example for fraud, where its enforcement would be contrary to BVI public policy, or if the proceedings in which the judgment was obtained were opposed to natural justice; and (iv) the judgment is final and conclusive.
4.3 Will the local courts recognise and enforce an arbitral award given against the company without re-examining the merits of the decision?
Yes, BVI court may refuse to enforce an arbitration award in some circumstances, including, for example, where the award: (a) deals with matters beyond the scope of the submission to arbitration; or (b) has not become binding on all parties (for example, if it was still subject to appeal).
4.4 When enforcing security, what factors significantly impact the time such enforcement takes and the value of the proceeds received from such enforcement? For example, are there any statutory requirements such as (a) holding a public auction; (b) court involvement; or (c) obtaining regulatory consents?
Factors influencing the time it takes to enforce security would include whether or not the security provider seeks to challenge the lender's right to enforce the security and the ease with which the lender can take possession of the secured assets. If the process of taking possession of and selling the secured assets is protracted, this might negatively impact the value of the proceeds resulting from enforcement.
Further, there is no requirement to hold a public auction, court involvement would not usually be necessary unless the security provider (or another party) challenges the enforcement of the security and, considering the types of assets over which security is typically granted in the BVI, it is very unlikely that regulatory consents would be required.
4.5 Are there any restrictions that apply specifically to foreign lenders when taking enforcement action?
No. Foreign lenders may enforce their rights against BVI companies in the same way as BVI-based lenders.
Section 5 – Bankruptcy and insolvency proceedings
5.1 Briefly, outline the main bankruptcy/insolvency processes in this jurisdiction, including any control or influence that creditors can exert on the process, the timeframes usually involved and any mandatory filing requirements.
A creditor of an insolvent company may make an application to court for the appointment of a liquidator. The court may appoint an eligible insolvency practitioner to a BVI company if the court is satisfied that the company is insolvent or if it is just and equitable for it to so do.
A BVI company will be insolvent if: (a) it fails to comply with the requirements of a statutory demand that has not been set aside; (b) execution or another process issued by the BVI Court in favour of a creditor of the company is returned wholly or partly unsatisfied; or, (c) it is proved to the satisfaction of the court that the value of the company's liabilities exceed its assets, or the company is unable to pay its debts as they fall due.
Applications for the appointment of a liquidator must be served on the company and advertised in the BVI Gazette and publications suitable for bringing the application to the attention of the company's creditors.
Taking into account the advertising requirements and the court's timetable, it is usually possible to have a hearing of an application for the appointment of a liquidator within four to six weeks of filing the application.
5.2 Are there any preference, fraudulent conveyance, clawback, hardening periods or similar issues or preferential creditor rights that lenders should be aware of?
Liquidators can bring claw-back and avoidance claims under the voidable transactions provisions contained in BVI legislation if a particular transaction could be said to give an unfair preference or was a transaction at an undervalue, a voidable floating charge or an extortionate credit transaction.
The hardening period for transactions giving an unfair preference, transactions at an undervalue and voidable floating charges is six months prior to the onset of insolvency (or two years in relation to transactions between certain connected persons).
A credit transaction entered into by the company in the five year period prior to the onset of insolvency may be challenged if the terms of the credit transaction require grossly exorbitant payments to be made or the transaction otherwise grossly contravenes ordinary principles of fair trading.
Creditors with preferential claims rank after secured creditors (who have a prior claim to the assets of the company and the costs and expenses incurred in the liquidation). However, preferential claims are rather limited in the BVI, relating to, for example, wages, pension contributions or medical insurance due to employees and social security payments and tax owed to the BVI government.
5.3 Do bankruptcy/insolvency processes provide for any kind of stay/moratorium on enforcement of lender claims? If so, does the stay/moratorium apply to the enforcement of security interests?
Yes. With effect from the commencement of liquidation, no person may (unless the court orders otherwise): (a) commence or proceed with any action or proceeding against the company or in relation to its assets; or (b) exercise or enforce, or continue to exercise or enforce, any right or remedy over or against assets of the company.
However, the above restrictions do not affect the rights of a secured creditor to take possession of and realise or otherwise deal with assets of the company over which the creditor has a security interest.
Section 6 – Your Jurisdiction
6.1 In no more than 200 words, outline any cross-border financing trends specific to your jurisdiction.
The BVI remains a popular and respected jurisdiction for companies entering into cross-border debt financing transactions. There are certain key features of BVI law that make the jurisdiction attractive to lenders. These include: (a) insolvency legislation that affirms the protection of creditors' rights; (b) the availability of a range of self-help remedies for secured creditors on enforcement, which are similar in many respects to the remedies available under English law; (c) the lack of restrictions on the type of financing transactions BVI companies can enter into as described above; (d) a straightforward security registration system providing a clear position as regards priority under BVI law; (e) a predictable legal system based on English law and a highly respected dedicated commercial court; and (f) the availability of high quality legal advice from international law firms.
As a result, BVI companies routinely continue to be involved as parties in high value and complex international financings arranged by the world's premier banks.
The latest OECD review of the BVI has given the jurisdiction the same tax transparency rating as the United Kingdom, the United States, Germany and Hong Kong.
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About the author
Nick Egan is based in Walkers' British Virgin Islands office, where he is senior counsel in the firm's global finance and corporate groups.
He advises clients on: mergers and acquisitions; takeovers; IPOs; joint ventures and shareholders' agreements; private equity; corporate reorganisations; debt and equity capital raisings and restructurings; banking; security; general corporate; and, regulatory matters.
Prior to joining Walkers, he worked in the corporate group of a leading London law firm for eight years.
About the author
Omonike Robinson-Pickering joined Walkers' British Virgin Islands office in 2009 where she worked in each of Walkers practice groups for 18 months. She was then permanently seated as an associate in the finance and corporate group. From 2012-2013, she worked in Walkers' Singapore and Hong Kong offices on secondment and is currently on secondment to Walkers' Cayman Islands office.
She advises on a range of finance, general corporate and commercial matters. Her finance experience includes asset finance transactions, general corporate financings and other secured and structured financings. Her corporate experience includes mergers and acquisitions, joint ventures and corporate restructurings. She also advises on probate and succession matters including applications for grants of personal representation.
She also regularly advises financial institutions and personal representatives handling the estates of high net worth individuals.