There is a good level of comfort with the new British Virgin Islands Business Companies Act 2004 (BCA), principally because, since 1 January 2006, users have been able to incorporate only BCA companies in the British Virgin Islands (BVI). At the end of 2006 the BVI bellwether vehicle the international business company (IBC) headed off into the sunset and companies incorporated under the BCA took centre stage.
To phase out IBCs, those that did not apply to reregister voluntarily under the BCA by 30 November 2006 were reregistered automatically as BCA companies on 1 January 2007.
It is worth noting that IBCs that automatically reregistered on this date are subject to a schedule of transitional provisions under the BCA rather than the full force of the default provisions in the BCA, so slightly different provisions of the BCA apply to reregistered IBCs as opposed to BCA companies incorporated under the BCA.
But caution should be exercised as to which provisions of the BCA apply: for those wishing to take advantage of some of the innovative provisions of the BCA, new BCA-compliant memorandums and articles of association may have to be adopted.
The repeal of the IBC Act means that, except for those grandfathering provisions that retain elements of the IBC Act to automatically reregistered IBCs, much of the BCA will apply to reregistered IBCs. In particular the following changes to the way IBCs have functioned should be noted.
One of the major flaws of the IBC Act (some say one of its greatest assets) was the absence of default positions on which an IBC could rely in the event that the memorandum and articles were silent on a particular point. The BCA comprehensively makes up for the deficiencies of the IBC Act by providing for default provisions such as quorum, voting majorities etc to enable proper functioning of companies where the memorandum and articles fail to properly provide them.
As the BCA will apply to automatically reregistered IBCs, these defaults will apply. This could be very helpful to most companies, but may have an unexpected and adverse consequence on application, particularly where IBC memorandum and articles have been drafted inadequately.
Certain provisions to be disapplied
From now on much more attention will need to be paid to the drafting of bespoke memorandums and articles, and anyone using standard ones should ensure that they contain key provisions for repealing potentially adverse BCA provisions that act as defaults where they are not provided for in BCA memorandums and articles, for example; the provisions on pre-emption will apply unless repealed specifically in adopted BCA memorandums and articles of association. No action is required for IBC memorandums and articles created since 1 January 2007.
Amendments to memorandums and articles
One remarkable provision of the IBC Act has bitten the dust. Directors will no longer have the power to amend the memorandum and articles in order to restrict the power of the members to make such amendments, or to change the percentage of members required to pass a resolution to make such amendments. The change is a good one and arguably long overdue as a provision wholly incompatible with English company law principles. The power of directors to amend memorandums and articles is, however, retained.
Registration of charges
The regime for maintenance and creation of priority over assets in favour of secured parties is overhauled in the BCA. While attractive when the IBC was first introduced, the option to create a private register of mortgages and charges at the registered office of an IBC has long been less than popular with secured lenders. The idea that this register had the final say, yet was not open to scrutiny, is an interesting but rather unsatisfactory outcome.
Not surprisingly, a best practice developed whereby the option was exercised under the IBC Act to file the ‘private’ register at the Companies Registry for notice purposes and statutorily to prevent amendment.
The new regime is certainly more transparent and useful for security givers. The BCA makes it compulsory for BCA companies to keep registers of charges (this applies to reregistered IBCs). The retention of this register does not create priority, although it does provide a record of secured transactions and, unlike the old ‘private’ register, it has no bearing on priority. In order to create priority over subsequently created security interests, the company must register the charge at the BVI Companies Registry.
In a welcome development, the registered security interest can now be registered (or discharged) by the secured party, thereby ensuring that there are no delays holding up funding and no concerns over the timely and eventual registration previously in the hands of the registered office of the company, and so making it subject to the goodwill of the charger in many instances where insufficient precautions had been taken by the secured party.
The need for great ingenuity in providing consideration for the issuance of shares is done away with, as the BCA introduces the concept of unpaid and partially paid shares into BVI law. Long accepted as a concept under English law, the change is welcomed as an additional tool for those structuring transactions involving equity.
Consideration for shares
Before issuing shares for consideration other than money, the directors must now determine the reasonable present cash value of the non-monetary consideration. The drafting makes it clear that this is a function for the directors and so it cannot be delegated to a committee. For investment funds this means that the administrator will not have the power to deal with subscriptions or transfers using assets as consideration without recourse to the directors. Potentially it also creates specific structuring requirements for convertible debt structures.
Removal of directors
The IBC Act required only a resolution of members or a resolution of directors to be passed by a majority at a quorate meeting or a majority of all directors by written resolution to remove a director.
Under the BCA, however, a member’s resolution to remove a director from office may, subject to the memorandum and articles, be passed only at a meeting of members whose purpose includes the removal of the director or by a written resolution passed by at least 75 per cent of the members entitled to vote.
A director may also be removed by other directors where expressly permitted by the memorandum and articles – in which case, subject to the memorandum and articles, the resolution to remove the director may be passed only at a meeting of directors whose purpose includes removal of the director or by a written resolution passed by at least 75 per cent of the directors.
In particular the BCA statutorily preserves the legal integrity of the IBC on reregistration, whether voluntary or automatic. Particularly, neither voluntary nor automatic reregistration affects a reregistered IBC’s identity, assets, rights and obligations, or the commencement or continuation of proceedings by or against the reregistered IBC.
These transitional provisions are designed to smooth the automatic reregistration process and avoid the need for wholesale amendments to the memorandums and articles of IBCs. This gives automatically reregistered IBCs a distinct IBC Act feel in certain areas – for example, for the purposes of the automatically reregistered IBCs only – although the BCA does away with the need for authorised capital, the concepts and practical operation of authorised capital, capital (and its par value characteristics) and surplus continue to be of application.
And because of the retention of the concept of par value, the provisions dealing with the purchase or redemption of shares and the declaration of dividends are preserved. Also, the IBC provisions for solvency tests for the declaration of dividends is kept in operation as the BCA revises the mechanism in terms of which directors to declare dividends.
Duncan Smith is a partner at Ogier