British Virgin Islands: The BVI International Business Company at the Crossroads

Taken from a speech delivered at the BVI IFC Road Show, Miami Florida November 2004

A little more than 20 years ago, a group of lawyers and other professionals from the British Virgin Islands first met with the then Attorney General to discuss the drafting of a completely new piece of companies legislation. The result, after much hard work, was the enactment in 1984 of the International Business Companies Act. Neither the BVI Government nor those professionals could have dared to hope that the IBC Act would achieve the levels of success that it has subsequently attained. Equally, they could not have foreseen that the Act would become a model adopted, often with just the name of the jurisdiction changed, by aspiring and established offshore financial services jurisdictions worldwide. Such is the dominance of the British Virgin Islands as a corporate domicile today that, in the Far East, international business companies are popularly known simply as "BVIs"!

Twenty years on, a Bill for a new "BVI Business Companies Act", has been drafted. The Bill will be enacted next month and will be brought into force on 1^st January next year. After a two-year transition period the new Act will replace both the IBC Act and the current Companies Act. From 1^st January 2007, all companies will be governed by the new Act and there will no longer be any distinction between "offshore" companies and companies carrying on business in the BVI. Happily, in undertaking this Project, the Government has received considerable input from some of those most closely concerned with the drafting of the original IBC Act.

Some have questioned the need for a new Companies Act at all. Why, they ask, as the IBC Act is so successful, do we need to replace it? This is a reasonable question that deserves an answer.

It is no secret that the initial impetus for the development and the drafting of the new Act was the international pressure that has been exerted on all financial services centres to abolish ring fencing both in respect of taxation and more generally. As a British Overseas Territory, the BVI is required to comply with the EU Code of Conduct on Business Taxation. Essentially, this requires that local and offshore companies should be treated equally for tax purposes. However, given the international climate, any jurisdiction that treats offshore companies differently from companies undertaking local business in a more general sense undoubtedly runs the risk of future problems with the international community. The BVI has always sought to stay "ahead of the game". This has helped to ensure that, to date, the BVI has never been placed on a blacklist or subjected to sanctions.

The new BVI Business Companies Act will abolish ring fencing entirely and to this end, all companies, offshore and local, will be placed within a zero tax regime.

Whilst ring fencing may have provided the initial impetus to the creation of the new Act, it soon became clear that the real benefits of the project lay elsewhere. There is no doubt that the IBC, although still serving the needs of many of the jurisdiction’s clients, has not kept up with developments within the financial services sector. Put simply, it is not sophisticated enough for the needs of many clients.

It is clear that the IBC has reached a crossroads. It is equally clear that moving ahead with the existing IBC Act in an unamended form is not an option. The Government therefore chose to undertake a thorough review of the IBC as a product with a view to enacting completely new legislation.

Given BVI’s market dominance with its existing Act, this is undoubtedly a bold decision. However, it would be a mistake to regard the market as static and an even bigger mistake for any jurisdiction to become complacent. To maintain its market position, the BVI needs to be proactive. By drafting new legislation, it has been possible to build on the very solid foundations laid by the IBC, without being constrained by the structure of the existing Act.

In my view, it is the upgrading of the corporate regime in the BVI that will be the greatest benefit of this exercise.

The first objective in drafting the bill was to carry through to the new legislation the many positive attributes of the IBC Act. The IBC Act works well, and it is clearly vital that its benefits are not lost in the process.

Other principal objectives included:

1. The abolition of ring fencing.
2. Retaining, as far as possible, the "look and feel" of the IBC.
3. Making the transition to the new Act as seamless as possible for existing IBCs.
4. Recognising that corporate legislation is enabling, not regulatory, in nature.
5. Providing significant added value by enhancing the "IBC product" particularly for those with more sophisticated uses for a BVI company.

The new Act obviously must also interface properly with the Insolvency Act which was brought into force earlier this year.

The timing for this Project has been fortuitous. Over the last few years a significant number of jurisdictions have undertaken company law reviews extending, in some cases to particular areas of company law, and in other cases to the entire body of their company law. These reviews have often resulted in new or amended legislation.

As part of this Project, many of the company reviews carried out over the last ten years or so have been considered.

We have also conducted a benchmarking exercise against the legislation, or parts of the legislation, of a number of onshore and offshore jurisdictions.

Although the company law of other jurisdictions, especially metropolitan jurisdictions, is not always relevant to the BVI, the reviews and the legislation that we have considered have enabled us to ensure that, to the extent appropriate, the new BVI Business Companies Act takes account of recent international developments in company law.

Key features of the new Act are:

The visible and tangible evidence of incorporation to the end client is the certificate of incorporation and the documents that legally constitute the company. Many jurisdictions have moved away from the traditional memorandum and articles of association to a "constitution" or "articles of incorporation" and bye-laws. However, although this may be the more modern approach, the resulting company would look very different to the service provider and to the client. A decision was therefore taken to retain the memorandum and articles of association.

Furthermore, the memorandum and articles of a company incorporated under the new Act can be made to look very similar to the M&A of an IBC.

Finally, the name of the Act, the BVI Business Companies Act has been very deliberately chosen to preserve the "IBC" branding. It is anticipated that this will greatly assist industry practitioners both within the BVI and overseas to transition the end client into the new legislation.

The IBC Act provides for just one type of company, a company limited by shares.

It is clear that there is demand in the market place for different types of company. The proposed new Act will therefore permit a company to be incorporated as a companies limited by guarantee, as a hybrid companies (a company limited by guarantee and shares) or as an unlimited company, with or without share capital.

It is proposed to provide for an entirely new type of company which, as far as we are aware, will be unique to the BVI. We have called this the "restricted purposes company". The RPC is designed to be used as a special purposes vehicle, especially within structured finance transactions.

The Insurance Act currently provides that an insurance company may register as a segregated portfolio company (or an SPC). This is very restrictive and there is definitely a demand for the categories of companies that may register as SPCs to be extended.

The SPC provisions in the Insurance Act have been reviewed, benchmarked against similar legislation in other jurisdictions, updated and inserted into the new Companies Act, which will repeal the SPC provisions in the Insurance Act.

The new Act is very flexible allowing insurance companies, mutual funds and such types or descriptions of categories of companies as may be prescribed in the Regulations to be incorporated, or registered, as SPCs. It is expected that, initially, only insurance companies and mutual funds will be permitted to incorporate or register as SPCs. However, in time, this could be extended to other types of company. There may well be a market for combining RPCs and SPCs. The point is that the Act is flexible.

The new Act will contain completely new provisions governing the registration of charges.

Registration under the new Act will be at the Companies Registry not at the registered office of the company, as under the existing Act. Registration will not be compulsory and there will be no fixed period within which a charge must be registered, as there is in many jurisdictions. However, the date of registration will govern priority. Registration may be effected by the secured creditor.

The certainty of the new Act should make the BVI much more attractive as a corporate domicile

A number of measures have been taken to achieve a smooth transition to the new Act, specifically:

1. The IBC Act will remain on the statute book until 1^st January 2007.
2. Throughout 2005, it will be possible for companies to be incorporated under the new Act or under the existing IBC Act and existing IBCs will be able to remain incorporated under, and governed by, the IBC Act.
3. From 1^st January 2006, it will no longer be possible to incorporate new companies under the IBC Act. All companies will be incorporated under the new Act. However, existing companies will still be able to remain incorporated under, and governed by, the IBC Act.
4. Throughout 2005 and 2006, IBCs will have the option of re-registering under the new Act, if they wish.
5. All IBCs that have not already re-registered under the new Act will automatically be re-registered under the new Act with effect from 1^st January 2007. From that date the IBC Act (and the existing Companies Act) will be repealed ad the new Companies Act will become the BVI’s sole corporate statute. There will be provisions in place to provide for the smooth transition of IBCs that are automatically re-registered under the new Act on 1^st January 2007.

In summary, the new Act will maintain the BVI’s status as the world’s leading corporate domicile through its careful drafting and the collaboration between public and private sector that have brought it into being.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.