The past 12 months have seen several developments in corporate law in the British Virgin Islands (BVI). The latest set of changes occurred on 1 January 2006. That date is important for two fundamental reasons: first, if one wants to form a company in the BVI, it must now be formed under the BVI Business Companies Act 2004 and may no longer be formed under the Companies Act Cap 285 (CA) or the International Business Companies Act Cap 291 (IBCA) of the laws of the BVI; second, the BVI Business Companies (Amendment) Act 2005 came into force, bringing several important changes to the new act.
We are at the mid-point of the two-year transition period provided for in the new act (from 1 January 2005 to 31 December 2006). Existing companies incorporated under the IBCA or the CA will continue to be incorporated under those statutes until 31 December 2006. However, on 1 January 2007, all companies incorporated under the IBCA or the CA that have not made applications to be reregistered under the new act shall be deemed to be reregistered under the new act.
Looking at the new act as a whole, together with the effect of the amendment act, the changes to BVI company law can be summarised as follows:
Types of companies: the new act specifically permits the incorporation of seven different types of companies, including those limited by shares, by guarantee, unlimited companies, restricted purpose companies and segregated portfolio companies.
Objects and powers: the salient changes brought about by the new act are as follows:
Memoranda and articles
An amendment to the memorandum or articles of a company is required to be filed publicly with the registrar of corporate affairs in the BVI and is not effective until this has been done. Under the new act, an application may be made to the court for an order that an amendment should have effect from a date no earlier than the date of the resolution to amend the memorandum and articles. This flexibility would be useful where the company has, for example because of a misunderstanding or assumption as to the requirements of BVI law, failed to make the necessary filing with the registrar of corporate affairs.
Shares and capital: there is no concept of ‘authorised capital’ or ‘share capital’ under the new act, therefore shares are effectively no par value shares. The requirement is for a company to state in its memorandum the maximum number of shares that it is authorised to issue, or that it is authorised to issue an unlimited number of shares and the classes of shares that it is authorised to issue, and where there are two or more classes then the rights attaching to each class.
Distributions: surplus, that is total assets minus total liabilities plus capital, was required by a company incorporated under the IBCA and the directors were required to make a solvency determination in order for the company to declare and pay a dividend. The new act does away with surplus altogether and distributions, if made, are required to be made (subject to certain exceptions) only after the directors of the company have satisfied themselves that the company will, immediately after the distribution, meet the statutory solvency test. A company satisfies the solvency test if the value of its assets exceeds its liabilities and it is able to pay its debts as they fall due. The provisions in the new act relate not merely to dividends but catch any distribution to a member. The same test applies in relation to a buy-back of shares.
Register of directors: a company incorporated under the new act is required to keep a copy of its register of directors at the office of its registered agent in the BVI. The registered agent is required to be notified of any change in the register of directors (and register of members for that matter) within 15 days of the change and must provide the registered agent with a written record of the physical address of the place or places at which the original register of directors (or register of members) is kept, as well as any change in that address within 14 days of the change.
Duties of directors: the commercial realities of joint ventures, holding companies and similar structures are recognised and the new act creates provisions that permit a director of a wholly-owned subsidiary to act in the interests of its holding company even if not in the best interests of the subsidiary. In the context of a joint venture, a director may act in the interests of a member or members, even if not in the best interests of the company. The above only applies if the memorandum or articles expressly permit. Otherwise, the usual common law duties apply and the statutory duties are similar to those that exist under the IBCA.
Registration of charges: the new act provides that, in addition to the company keeping a register of charges at its registered office or at the office of its registered agent, charges are also registrable with the registrar of corporate affairs. Either the company or a chargee can apply to the registrar of corporate affairs for registration of the charge in a register of registered charges, and there is no time limit. Registration with the registrar of corporate affairs is not mandatory and failure to register does not affect the validity of the charge or its enforceability. It does, however, affect the priority of charges created on or after 1 January 2005, save that, in relation to a company incorporated under the IBCA or the CA, registration will affect priority regarding charges created on or after the date that the company reregisters under the new act. Once a charge is entered in the register of registered charges, it takes priority over all other charges created by the company except for such charges as were entered in the register of registered charges ahead of it. Creditors can now have the option to exercise a degree of control over the process of registration in the register of registered charges that they did not previously have.
Members’ remedies: a whole host of remedies are now available to a member under the new act. Derivative actions (which require the leave of the court) can be taken in certain circumstances, and a member who feels that the company is conducting its affairs in a manner that is likely to be oppressive or unfairly prejudicial may apply to the court for an order.
Schemes of arrangement: this is new to the new act and facilitates a compromise or arrangement between the company and its creditors, or between the company and its members.
For several months it had been recognized that an amendment act was required to address various issues brought about by the coming into force of the new act. The amendment act imports desirable provisions from the IBCA, introduces members’ remedies, provides for schemes of arrangement and reserve directors, introduces indemnification of directors in advance of disposition of proceedings and also addresses inconsistencies in the new act as a whole. Thus the new act, as amended, is much improved while retaining many qualities of the IBCA that initially proved attractive for investors.
Leonard Birmingham is a partner at Harneys