The BVI Business Companies Act 2004 (the "New Act") repealed the International Business Companies Act (the "Old Act") with effect from 1 January 2007.
Since 1 January 2006, all British Virgin Islands companies (the "New Act Companies") have been incorporated as business companies under the New Act.
Companies registered under the Old Act (the "Old Act Companies", and together with the New Act Companies, the "BVI Companies") that did not voluntarily apply for re-registration between 1 January 2005 and 30 November 2006 were re-registered automatically under the New Act on 1 January 2007 as companies limited by shares.
Transitional provisions (the "Transitional Provisions") set out in Schedule Two to the New Act apply to the Old Act Companies that were automatically re-registered (the "AR IBCs", and each the "AR IBC"), and not to Old Act Companies that voluntarily applied for re-registration under the New Act (the "VR IBCs", and each the "VR IBC").
An AR IBC may at any time adopt a set of memorandum of association ("Memorandum") and articles of association ("Articles", and together with Memorandum, "M&A") that are fully compliant with the New Act. Once they are adopted, the Transitional Provisions no longer apply.
This article sets out some of the issues that may require special attention when dealing with the AR IBCs.
Register of Mortgage and Charges
Recently, a paragraph in a certificate of incumbency issued by the registered agent of an AR IBC was somewhat misleading. It read:
The Company does not maintain at its Registered Office a copy of a register of mortgages and charges created under the International Business Companies Act and/or a copy of a register of charges under section 162 of the BVI Business Companies Act (the "Act"). It should be noted that a Register of Registered Charges in respect of the Company may be kept at the Registry of Corporate Affairs pursuant to section 163 of the Act. The keeping of any such Register of Registered Charges is independent of the keeping of any register at its Registered Office and the contents of a Register of Registered Charges may not correspond with those of any register at the Registered Office.
Section 163 of the New Act provides that where a company creates a relevant charge, an application may be made by the company or the chargee to the Registrar of Corporate Affairs of the British Virgin Islands (the "BVI Public Registrar") to register the charge in that company's Register of Registered Charges. Registration determines the priority of charges created by a New Act Company on or after 1 January 2005.
Registration in the public register will affect priority for charges created by an Old Act Company on or after the date the company re-registered under the New Act. Registration under section 163 does not affect the validity or enforceability of the charge, which is determined by its governing law.
However, section 162 of the New Act provides that a company must maintain a register of all relevant charges where the company has created the charges. The register must be kept at the registered office of the company or at the office of its registered agent. Failure to do so is an offence, and the company is liable on summary conviction to a fine of $5,000.
Consequently, the paragraph in the certificate of incumbency is somewhat misleading. Filing of a charge in a company's Register of Registered Charges maintained by the BVI Public Registrar is optional, but is not a substitute for the requirement that it make an entry of that particular charge in the private register of charges of that BVI Company, providing that the particular charge has been entered into by a New Act Company or by an AR IBC after 1 January 2007.
The concepts of authorised capital, share capital and general capital maintenance have been removed under the New Act. The Memorandum of a New Act Company need only state the maximum number of shares it is authorised to issue or state that there is no such limit.
However, the Memorandum of an AR IBC must contain a statement of its authorised capital. AR IBCs can keep their existing capital structures under the New Act, and the provisions in the Old Act that relate to capital, dividends and share redemptions have been 'grandfathered' into the New Act. Thus the AR IBC can continue using the phrase "authorised capital" in its Memorandum. A VR IBC, in the course of its re-registration under the New Act, would have adopted constitutional documents compliant with the New Act, and its Memorandum would contain a statement addressing the number of shares authorised rather than a statement regarding authorised capital.
Section 13 of the Transitional Provisions, in place of the requirements specified in section nine of the New Act, requires the Memorandum of an AR IBC to include those statements that were required under the Old Act, including the objects or purposes for which the company was incorporated.
Section 5(1)(a) of the Old Act made a distinction between a company carrying on a business outside the British Virgin Islands and a local company, providing that "for purposes of this Act, an International Business company is a company that does not carry on business with persons resident in the British Virgin Islands". Section 12(1)(l) of the Old Act required the restriction to be set out in the Memorandum of the Old Act Company. Thus the Memorandum would typically provide that "the Company may not carry on business with persons resident in the British Virgin Islands" (the "Old Memorandum Clause").
The New Act does not prohibit a BVI Company from carrying on a business with a local company. Instead, under section 9(4) of the New Act, the Companies Regulations may require the Memorandum of a BVI Company to contain a statement setting out any limitations on the business that the BVI Company may carry on.
Some may argue that section 5(1)(a) of the Old Act has been repealed, and consequently the Old Memorandum Clause provisions have no legal effect. That position gains added weight since section five of the Old Act is not 'grandfathered' into the New Act.
However, section three of the Transitional Provisions provides that the Memorandum of an AR IBC must include, among other things, objects or purposes in order for it to be incorporated. Further, they provide that if the Memorandum contains a statement, either alone or with other objects or purposes, that the object or purpose of the company is to engage in any act or activity that is not prohibited under British Virgin Islands law, the effect of that statement is to make all acts and activities that are not illegal part of the objects or purposes of the company, subject to any limitations in the Memorandum.
Our view is that if the M&A of an AR IBC contains the Old Memorandum Clause, then that clause is binding on the AR IBC and its shareholders as a matter of contract insofar as the New Act does not expressly disallow any such restriction on the powers of the AR IBC. An AR IBC should therefore have its M&A carefully checked so that the objects and purposes as stated in the M&A correctly mirror the true objects and purposes of the AR IBC.
Duties of Directors
Section 120(1) of the New Act provides that a director of a British Virgin Islands company, in exercising his powers or performing his duties, must act honestly and in good faith and in what the director believes to be the best interests of the company.
There is an exception, however, Section 120(2) of the New Act provides that a director of a wholly owned subsidiary may, when exercising powers or performing duties as a director, act in a manner that he believes is in the best interests of that company's holding company even though it may not be in the best interests of the company of which he is a director. However, this is only permitted when it is expressly provided for in the Memorandum or Articles of the company.
A number of issues arise in relation to AR IBCs that do not present themselves where VR IBCs are concerned. Consequently, professional advisors, directors, registered agents and potential investors must be familiar with the provisions of the Old Act and the authorised capital, capital and surplus definitions associated with it in order to avoid breaching the law.
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.