This briefing provides an overview of the British Virgin Islands ("BVI") restricted purposes company, a vehicle specifically designed for securitizations and other transactions where an insolvency-remote vehicle is required.

A key principle underpinning BVI company law is transactional certainty and the protection of third parties. A third party who transacts with a BVI business company can generally be confident of the validity of the transaction and that it will not be set aside as a result of a lack of capacity, power or authority of the company.1

However, as a popular jurisdiction for structured finance transactions, the BVI also recognises that in certain circumstances it may be advantageous to restrict the range of transactions that can validly be entered into by a BVI company. In particular, where an insolvency-remote company is required, it is highly desirable to limit the transactions the company can lawfully enter into to a specific transaction at hand. To this end, the BVI has introduced a unique and innovative vehicle, the restricted purposes company, which will be of interest to lenders, sponsors and other parties involved in securitizations and other transactions where an insolvency-remote vehicle is required.

This article looks at some of the main features and uses of a BVI restricted purposes company.

1. Key features of a restricted purposes company

A restricted purposes company is similar to a BVI business company except that it may only lawfully undertake transactions and activities within or incidental to its specified purposes. These purposes must be set out in the company's memorandum of association, which must also include a statement that the company is a restricted purposes company. Once the company's purposes have been specified:

  • the entire world is deemed to have notice of the company's restricted purposes and capacity; and
  • any transaction which is not within or incidental to the restricted purposes of the company is void.

2. Ability to entrench purposes

If desirable, the memorandum of association can also provide that the restricted purposes may not be amended under any circumstances.

As a practice point, care should be taken to avoid incorporating a restrictive purposes company with entrenched purposes which ultimately prove to be overly restrictive. It is usually preferable to incorporate the company with the ability to amend its restrictive purposes and then to adopt (and entrench) the restrictive purposes only on closing of the transaction it has been incorporated for.

3. Name

In order to identify that the company is a restricted purposes company, it is required to have a name ending in the term "(SPV) Limited" or "(SPV) Ltd". If a BVI company name ends with either of these terms, any transaction with the company should be treated with the utmost caution and it is necessary to confirm that the transaction or activity is within the company's purposes.

4. Cost

The annual government fee for a restricted purposes company is $5,000, rather than the $350 minimum fee which applies to a standard BVI business company. This large discrepancy is designed to ensure that restricted purposes companies are only used for the types of sophisticated transactions for which they were intended.

5. International effect

BVI restricted purposes companies will in most instances conduct all or nearly all their transactions under the laws of a jurisdiction other than the BVI (for example New York or English law) and their assets will typically be located outside the BVI. Accordingly, in proceedings outside and/or under laws other than the BVI, the extraterritorial effect of the restricted purposes needs to be considered and determined in accordance with the relevant conflict of laws principles. However, under BVI law conflict of laws principles, any transaction entered into that is not within the restricted purposes will be void and unenforceable and, as a general principle, any foreign judgment to the contrary effect would not be enforceable in the BVI.

6. Uses

The restricted purposes company was primarily designed for structured finance transactions. An important feature of many structured finance transactions, and a typical rating agency requirement, is that the issuer should be considered to be insolvency or bankruptcy remote. Part of this depends on the company not engaging in activities other than the single purpose of undertaking a specific transaction. While it is possible to contractually limit the transactions which a standard company can undertake or to limit the power of the directors to enter into certain transactions, the legal effect of this is very different from limiting the purposes of a restricted purposes company. A breach of a contractual restriction will rarely render a transaction with an innocent third party invalid. Rather, it usually results in a default and/or a claim for damages against the company. On the other hand, a transaction by a restricted purposes company which is not within its purposes will be void, offering much more effective protection for creditors of the company.

Although the above is by far the most obvious use, there are other ways in which re stricted purposes companies can prove useful. For example, if for some reason (legal or commercial) security over an asset is not possible, a restrictive purposes company can be used to facilitate quasi-security by limiting the purposes of the company to incurring the specific secured obligation and holding the security asset. The creditor can be confident that there can be no other claims against the company (and therefore the asset) which could compete or have priority. We are aware of a number of examples of limited partnership interests in private equity funds – which typically have restrictions in respect of security - being financed in this way.

Another use of a restricted purposes company is in connection with succession and estate planning. For example, to ensure that heirs cannot dispose of an asset for a period after death, an asset may be contributed to a restricted purposes company whose purposes are restricted to holding the asset until a specific date (with no power to deal or dispose of the asset until such date). This structure binds the heirs upon their becoming shareholders of the restricted purposes company following the death of the individual shareholder.

7. Precedents

BVI restricted purposes companies have been successfully used on a number of structured finance transactions. High profile examples include:

  • Dong Fang's US$200 million and US$159 million shipping container securitizations through Dong Fang Container Finance (SPV) Limited and Dong Fang Container Finance II (SPV) Limited respectively (which Conyers advised the issuers on); and
  • CEMEX's US$1.5 billion financing through C5 Capital (SPV) Limited and C10 Capital (SPV) Limited.

8. Conclusion

Restricted purposes and constructive notice are inherently old fashioned principles of common law. However, in recognising the possibilities they offer and using them to create the restricted purposes company, the BVI has continued its long standing tradition of corporate innovation and created a unique vehicle which is specifically designed to address the needs of structured finance and other transactions where insolvency-remote vehicles are required.

Robert Briant contributed to this article.

Footnote

1. Indeed, the BVI was one of the first common law based jurisdictions to provide for companies to have unlimited capacity and power. A cutting edge innovation when first introduced in 1984, this position has since been adopted in many other jurisdictions. The BVI corporate statute was substantively updated in 2004 with the BVI Business Companies Act, which in addition to unlimited capacity introduced a range of provisions designed to protect third parties and uphold transactional certainty.

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.