British Virgin Islands: BVI Security Update
Originally published May 2005

If you or your clients are taking security from BVI companies you need to be aware of recent developments flowing from the introduction of the BVI Business Companies Act 2004 and the Insolvency Act 2003. These legislative changes will have an impact on what security package is appropriate and how it is constructed.

Both pieces of legislation have the potential to strengthen the position of the well advised secured creditor but there are transitional issues and other changes which need to be considered and in all probability acted upon. Harneys advises almost all major financial institutions doing business with BVI entities and would be delighted to give you more specific advice if required.

In the 20 years since its enactment, the International Business Companies Act (the "IBC Act") had become one of the world’s most widely used corporate statutes and over 600,000 companies ("IBCs") have been incorporated under it. Whilst the need for reform had become evident to practitioners the key imperative was that this took the form of evolution and the new corporate statute retains the features which had made the IBC so widely utilised. This need also informed a two-year transition period during which both the International Business Companies Act and the BVI Business Companies Act will be in force. After the two-year period, the new Act will be the sole corporate statue for the BVI and will regulate all BVI companies.

• 01.01.05 – 31.12.05: it is possible to incorporate new companies under the IBC Act or the BVI Business Companies Act. Existing IBCs are able to re-register under the BVI Business Companies Act

• 01.01.06 – 31.12.06: new incorporations will only be possible under the BVI Business Companies Act. Existing IBCs will be permitted to continue under the IBC Act but they will also be able to re-register under the BVI Business Companies Act

• 01.01.07: all remaining IBCs incorporated under the IBC Act will be automatically re-registered under the BVI Business Companies Act

The most significant improvement is that registration of security is a creditor driven process. The fact that registration of security in respect of IBCs is debtor driven has caused many practical problems over the years. We have created solutions but all added layers of cost and uncertainty which were inherently undesirable. Under the BVI Business Companies Act particulars of the relevant charge can be registered in a public register of registered charges. It is this registration which drives priority and the relevant filing can be made by the secured creditor or its advisors.

Registration remains voluntary in the sense that failure to register does not affect the charge’s validity or enforceability even as against a liquidator; it follows that there is no time limit for registration. However, in addition to the priority issue, a floating charge must be registered in order to give the protections discussed later in this briefing.

The priority rules for companies which are from the beginning of their lives incorporated under the BVI Business Companies Act are fairly clear

• A registered charge has, as a matter of BVI law, priority over a subsequently registered one or an unregistered one

• Unregistered charges rank amongst themselves in accordance with common law rules

The statutory priority rules can be varied by agreement between secured creditors and a registered floating charge ranks after a subsequently registered fixed charge unless the fixed charge breaches a negative pledge in the floating charge. It does not appear to be necessary that the negative pledge provisions themselves be registered to achieve this result.

Charges created before the coming into force of the BVI Business Companies Act (for all practical purposes those created by IBCs ) continue to rank (even against charges registered as above) as they currently do. There is a minor drafting error in the BVI Business Companies Act in relation to this which is likely to be corrected in amendment legislation due during 2005 but we do not believe it has the capacity to cause substantial issues.

More significantly, as drafted the BVI Business Companies Act creates a transitional priority problem in respect of any security granted by an IBC after 01.01.05. At the point at which the IBC becomes a company under the BVI Business Companies Act such security becomes vulnerable to losing its priority. In essence the BVI Business Companies Act fails to preserve the previous ranking of any security created after the commencement date despite the fact that security was created when a company was still an IBC. The critical point comes only when the IBC becomes a company under the BVI Business Companies Act. Theoretically this could be or have been at any point after 1^st January 2005 and will in any event occur on 1^st January 2007.

A legislative solution to this problem is required and we expect one during 2005. In the meantime, a number of alternative strategies exist. The first is to require an IBC to re-register under the BVI Business Companies Act as part of any transaction in which it gives security. Given that the very first re-registration was processed in early May 2005 this has not been a practical solution up until now. It may become more practical going forward.

Covenants not to re-register without secured creditor consent should be considered but suffer from the classic negative pledge problem of giving a remedy (acceleration) which has no impact on the proprietary position.

We are also discussing with the registrar of companies whether a "springing application" (in some ways akin to an English Slavenburg application) can be used in the interim.

The Insolvency Act introduced two concepts that are new to the BVI, that of the administrator and the administrative receiver. Both offices are brought across from the English 1986 insolvency legislation but do not follow the path of the English Enterprise Act which has arguably reduced the primacy of the secured creditor. Administrators and administrative receivers are required to be licenced BVI insolvency practitioners.

Administration is a court driven breathing space during which rescue of the business or an opportunity to dispose of assets more advantageously than would have been the case in a liquidation can be attempted. An administrator is appointed by order of the court which must be satisfied that the statutory grounds (including insolvency) exist. The administrator takes control of the company and must formulate proposals for consideration by the company’s creditors. If these are approved the administrator manages the company’s business, assets and affairs in accordance with the proposals until the purpose is achieved or the administrator becomes of the opinion that it cannot be.

Somewhat different is the administrative receiver, an insolvency practitioner appointed by a qualifying charge holder. Subject only to acting in good faith and for a proper purpose, the administrative receiver’s primary duty is to act in what he believes to be the best interests of the person who appointed him.

In essence an administrative receiver can be appointed by a secured creditor holding a floating charge over the assets of the BVI company. It is therefore appropriate to rethink the security package for BVI issuers or borrowers and to consider very carefully whether a floating charge should form part of that package.

One defensive reason for having a floating charge is that it essentially gives the secured creditor a veto over administration. Although not a "debtor in possession" tool administration is a court driven, rehabilitation insolvency process containing collective elements which may not be desirable from the secured creditors perspective. The existence of a qualifying floating charge enables the secured creditor to determine at the time of insolvency whether such a process is in its interests or not.

Even if the veto on administration were not an issue, in the administrative receiver, the Insolvency Act has created a powerful enforcement tool which allows continued trading with absolute secured creditor control.

Whether a BVI law governed floating charge or a foreign instrument with the requisite characteristics is appropriate and whether a "featherweight" charge (which is given statutory recognition) is appropriate will be an issue to be decided on a transaction by transaction basis.

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.