BVI Business Companies Act, 2004

BVI Business Companies Act, 2004

Chris McKenzie, Maples and Calder

Whilst at the time of writing the British Virgin Islands ("BVI") Business Companies Act (the "Act") 2004 has only had its first reading as a Bill, it is expected to become law as at 1st January, 2005. This will coincide with the Territory's amendment of the The Income Tax Act, to zero rate all personal income tax and corporation tax for domestic companies.

Once enacted the Act will replace the Territory's archaic domestic Companies Act and the enormously successful International Business Companies Act, introduced in 1984.

Introduction of the Act is as a result of two main reasons. Firstly, it is in response to the various international initiatives, in particular the O.E.C.D initiatives on unfair tax practices. One of the criteria for identifying whether a jurisdiction was responsible for committing unfair tax practices depended on whether the jurisdiction provided for different types of company and applied different tax regimes to its onshore domestic companies from those established solely for conducting international business. By introducing the Act, which provides for the incorporation of both domestic and international companies as well as zero rating income tax and all corporation tax, the BVI has fulfilled its pledge to the O.E.C.D. in order to be removed from its list of uncooperative countries.

The second main reason for the introduction of the Act, was the recognised need to make improvements to the existing International Business Companies Act ("IBC Act"), in order to meet international business demands and practices, eg. make it more acceptable for listing on international stock exchanges and to make it a more flexible vehicle for use in establishing investment funds. However, in designing the Act, it was always the legislatures intention to retain the flexibility of the IBC Act by allowing the incorporation of companies for a wide variety of legitimate purposes as well as keeping regulation separate from the Act as far as possible.

Type of Company

Section 5 of the Act provides for the following types of company to be incorporated or continued:-
 

  1. a company limited by shares;
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  3. a company limited by guarantee that is not authorised to issue shares;
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  5. a company limited by guarantee that is authorised to issue shares;
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  7. an unlimited company that is not authorised to issue shares; or
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  9. an unlimited company that is authorised to issue shares.
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Restricted Purpose Company

Moreover, a company limited by shares may in its Memorandum of Association ("Memorandum") state that it is a restricted purpose company and stipulate in its Memorandum the purpose of the company. Once a company is incorporated and a certificate of incorporation is issued as such, then it will not be permitted to delete or modify its Memorandum to remove its status as a restricted purpose company, although the stipulated purposes may be amended subject to the Act. Any resolution to such effect will be void and of no effect, although there are limited provisions in the Act to amend the purposes set out in the Memorandum, subject to certain conditions.

Restricted Purpose Companies will naturally be an ideal vehicle for either on or off balance sheet SPV's in structured finance and capital market transactions.

Segregated Portfolio Company

The final type of vehicle that can be established under the Act and which will be of great interest to the hedge fund industry is a segregated portfolio company. Whilst practitioners have hitherto been able to structure companies with separate classes of shares to represent different investment portfolios, this would not ring fence the assets of a portfolio from general expenses of a company or prevent cross liability between classes (i.e. one class of assets being used to offset the debts or liabilities of another if the assets of a particular class are not sufficient to meet its liabilities).

A segregated portfolio or "SPC" will therefore be ideal for creating multi-class investment funds.

An SPC can only be incorporated as a company limited by shares and the prior approval of the BVI Financial Services Commission is required before incorporation. Approval is conditional on the company subsequently applying to be licensed as an insurance company, or to be registered as a public or recognized as a private or professional fund under the BVI Mutual Funds Act. Further flexibility of the Act is evidenced by the fact that the Memorandum of Association need not state at the time of incorporation the number of segregated portfolio share classes, the classes can be created if and when needed. Once created, dividends and distributions may be paid or made by reference only to the segregated portfolio assets and liabilities attributable to the segregated portfolio. For the purposes of determining whether a segregated portfolio satisfies the solvency test in connection with the declaration of a dividend or payment of a distribution, no account will be taken of the assets and liabilities attributable to any other segregated portfolio of the SPC, or its general assets and liabilities. Any deed, agreement, contract, instrument or arrangement which is to be binding or to inure to the benefit of a segregated portfolio or portfolios must be executed by the SPC specifically on behalf of the segregated portfolio. The Director's of the SPC are required to keep separate and separately identifiable, segregated portfolio assets (i) from general assets; (ii) from any other segregated portfolio; and (iii) where required, to apportion or transfer assets and liabilities between segregated portfolios or between segregated portfolios and general assets of the SPC.

Other Features

Although the Act has provided for a wider range of corporate vehicles, the expectation is that a company limited by shares will remain the most common. In this respect, fundamental changes have been included which distinguish the Act from the IBC Act, two of the most important examples relate to shares and distributions/dividends, the more important details of which are as follows:-

(i) Shares

The concept of "authorized capital" has been abolished and the Memorandum of Association no longer needs to state the amount of authorised capital, only the maximum number of shares the company is permitted to issue, the class of shares that the company is authorized to issue and, if the company is authorized to issue two or more class of shares, the rights, privileges, restrictions and conditions attaching to each class of shares. Because of the provision in the IBC Act requiring the Memorandum of Association to state the number of classes, the number of series in each class and the number of shares in each class and series, this has historically made the structuring of funds which are subject to series accounting for the purposes of calculating incentive/performance fees extremely difficult and inflexible. Accordingly, these new provisions will be welcomed by the fund industry. Moreover fractional shares can be issued and the par value of a share may be a fraction of the smallest denomination of the currency in which it is issued. Thus a US$0.001 par value share (and smaller) may be issued. Although these provisions are quite different from those currently part of the IBC Act, they will not affect existing companies which will not be required to amend their existing Memorandum and Articles.

Finally, the Act has provided for default rights attaching to shares, subject to the specific rights set out in the Memorandum and Articles eg. one vote per share, equal dividend rights and the right to participate equally in the distribution of surplus assets.

(ii) Distributions

The Act has ignored the troublesome definition and distinction between "capital" and "surplus" and does not contain any reference to either which is to be welcomed, although there is nothing to prevent a company from using these terms in its Memorandum and Articles for its own accounting purposes. A company need only satisfy a solvency test (immediately after the distribution) in order to make a distribution. The solvency test is satisfied if:-

(a) the value of the company's assets exceeds its liabilities; or
(b) the company is able to pay its debts as they fall due.

The term "distribution" is given a wider meaning than in the IBC Act and includes the incurring of a debt to or for the benefit of the member. The effect of this is that parent guarantees will be considered a distribution and therefore subject to the solvency test.

One should note, that where distributions are made and the solvency test is not satisfied, then the distribution may be recovered by the company from the member unless: (a) there was good faith on the part of the member; (b) the member's position was altered in reliance on the validity of the distribution; and (c) it would be unfair to require repayment.

If the procedure for authorizing the distribution is not followed or there are not reasonable grounds for believing that the company would satisfy the solvency test, a director who failed to take the proper steps or who signed the certificate confirming that the solvency determination was satisfied, is personally liable to the company to repay to the company that much of the distribution as is not recoverable from the shareholders.

Finally, by ignoring the distinction in the Act between "capital" and "surplus", it will make the redemption of shares in investment funds a lot simpler. Previously a company could only purchase or redeem its shares out of surplus, but now it must simply satisfy the above solvency test.

Miscellaneous

Other miscellaneous provisions in brief introduced by the Act are as follows:-
 

  • any person may be an incorporator, but only a licensed registered agent may file the incorporation documents at the Companies Registry. On the incorporation of a company the incorporator becomes a member of the Company with effect from the date of incorporation;
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  • statutory recognition is given to foreign character names and the name of a company may comprise "BVI Company's Number [ ] Limited/Inc. etc" and then specify a foreign character name. This is convenient for forming large numbers of shelf companies or companies where names are immaterial;
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  • the Memorandum of Association may specify that the Memorandum and Articles may not be amended or that they may only be amended if certain specified conditions are met;
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  • a change in the registered agent will not be an amendment to theMemorandum of Association and will therefore not need to be filed at the Registry of Corporate Affairs;
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  • the registers of members, directors and charges (or copies thereof) must be kept at the Registered Office; and
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  • the Act sets out a new procedure for the registration of charges which includes any form of security interest. A secured creditor or authorised representative can now register the charge itself without having to rely on the registered agent to make the filing, although there remains no time limit within which the registration must be made. While a company must now keep a register of charges at the company's registered office or at the office of its registered agent, the filing of the register at the Registry is still optional. However charges registered at the Registry have priority over charges recorded in the register retained only at the company's registered office. Notwithstanding the fact that the charge may be registered at the Registry, it can only be inspected with the written permission of the company or its registered agent. These provisions should give the added protection to chargees whilst maintaining a proper level of confidentiality.
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Transition

Given the speed at which the Act has been passed, the Financial Services Commission has introduced a two year transition period ending 31st December, 2006, the specifics of which are:-
 

  • throughout 2005, new incorporations will be possible under all three pieces of corporate legislation in the BVI, namely, the Companies Act, the IBC Act and the Act, but existing companies may, from January 1, 2005 elect to convert into companies established under the new Act.
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  • in 2006, new incorporations will only be possible under the Act and companies already incorporated under the Companies Act or the IBC Act will be permitted to continue to operate under the respective legislation for one final year to enable them to prepare for transition to the new Act.
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  • on 1st January, 2007, any companies remaining on the Register maintained under the existing Companies Act and the existing IBC Act will automatically be re-registered under the Act and therefore, by 2007, all companies registered in the BVI will be operating under the new regime.

Although at the time this article is published, the Act will no doubt be in force, it is already anticipated that an amendment act will be subsequently passed sometime in 2005 to add regulations and schedules together with any other tidying up amendments. Given the speed with which the Act was drafted and passed, this is hardly surprising, although confidence in the Territory is high in it becoming a worthy successor to the IBC Act in particular to the offshore industry.

For further information, please contact Chris McKenzie on 0207 466 1600 or chris.mckenzie@maplesandcalder.com