A Q&A guide to lending and taking security in British Virgin Islands. The Q&A gives a high level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security and guarantees. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the priority of debt; debt trading and transfer mechanisms; agent and trust concepts; enforcement of security interests and borrower insolvency; cross-border issues on loans; taxes; and proposals for reform.
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This article is part of the PLC multi-jurisdictional guide to finance. For a full list of contents visit www.practicallaw.com/finance-mjg.
The BVI is one of the world's leading international financial centres. The BVI continues to be a jurisdiction of choice for companies entering into secured and unsecured finance transactions. Significant developments in the previous 12 months include amendments to the key corporate legislation, the BVI Business Companies Act 2004 (Companies Act), which have enhanced the public filing system for the registration of security interests. The creation of security over shares in BVI companies remains popular. Following the amendments to the Companies Act, a chargee can now enforce a BVI law governed share charge immediately on default (the amendments removed mandatory grace/notice periods). For an English law governed charge over shares in a BVI company that provides for appropriation of the shares, the Privy Council has also recently provided more guidance on the rights of the parties in Cukurova Finance International Limited and Cukurova Holdings A.S (Appellants) v Alfa Telecom Turkey Ltd (Respondent) [2013] UKPC 2.
The BVI is a leading jurisdiction for the incorporation of investment holding companies and BVI companies hold real estate located across the world. A BVI company can create and perfect security over interests in real estate in the manner permitted/required in the jurisdiction where the real estate is located. The holding of an interest in real estate in the BVI itself requires, with certain exceptions, a Non Belongers Land Holding Licence. Application for this licence must be submitted together with the requisite supporting documentation to the BVI Ministry for Natural Resources and Labour, and the prescribed process followed.
A legal mortgage over land is the most common security over real estate. However, security can be created in any form appropriate to the relevant jurisdiction.
Formalities depend on the laws of the jurisdiction where the real estate investment is located.
Companies can enter into contracts that (Section 103(1), Companies Act):
By or on behalf of the company are in writing under the common seal of the company, if that contract could be entered into by an individual and would be required by law to be in writing and under seal. These contracts can be varied or discharged in the same manner.
By or on behalf of the company are in writing and signed by a person acting under the express or implied authority of the company, if that contract could be entered into by an individual and would be required by law to be in writing and signed. These contracts can be varied or discharged in the same manner.
An instrument is validly executed as a deed or an instrument under seal if it is either (Section 103(4), Companies Act):
Sealed with the common seal of the company and the application of the seal is witnessed by a director or such other person who is authorised by the company's memorandum and articles of association to witness the application of the company's seal.
Expressed to be, or is expressed to be executed as, or otherwise makes it clear on its face that it is intended to be, a deed and it is signed by a company director or a person acting under the express or implied authority of the company.
There are no perfection requirements necessary under BVI law to recognise the validity or enforceability of security created by BVI companies. However, the following steps can be taken to protect a lender's security and ensure the lender is conferred with priority against unsecured creditors and subsequent secured creditors:
Particulars of a "relevant charge" created by a BVI company under section 163 of the Companies Act, including a mortgage, can be filed with the Registry of Corporate Affairs of the British Virgin Islands (Registry) for a fee of US$100.
The particulars of the charge are then placed on the BVI company's corporate records at the Registry to put third parties on constructive notice of the existence of the security interest.
The filing also acts as a priority determinant vis-à-vis subsequent filed security for the secured asset and the claims of unsecured creditors.
A company must keep a register of all relevant charges created by the company, either at the company's registered office, or at the company's registered agent's office (Companies Act).
A BVI company can create and perfect security over interests in tangible moveable property in the manner permitted/required in the jurisdiction where the property is situated.
There are a large number of BVI companies that own, finance, and sell and lease back aircraft. These are predominately corporate and business jet aircraft. However, they also include aircraft operated by commercial airlines, as well as helicopters. In addition, the BVI has long been a jurisdiction of choice for the holding of yachts and pleasure craft. It is therefore common for a BVI company to secure interests in aircraft and vessels. A typical aircraft financing transaction includes:
A company's loan obligations under a facility agreement that is supported by an aircraft mortgage (governed by the laws of the state of aircraft registration).
Assignments for:
aircraft and engine maintenance support agreements; and
insurances and warranties.
A tripartite agreement governing the management and operation of the aircraft, if an aircraft manager or operator has been appointed.
Various supporting ancillary notices of assignment, de-registration powers of attorney.
A typical yacht financing would include a ship mortgage and assignment of insurance.
Formalities depend on the laws of the jurisdiction in which the asset is situated and/or registered. The BVI Government recently enacted the Mortgaging of Aircraft and Aircraft Engines Act 2011 to facilitate the establishment of a comprehensive aircraft and security registration system in the BVI with a view to creating and implementing an effective regulatory oversight regime.
For vessels registered at the BVI Shipping Registry, the registration of mortgages is governed by sections 80 to 86 of the Merchant Shipping Act 2001 (Merchant Shipping Act). The BVI Shipping Registry facilitates the entry, transfer and discharge of marine mortgages over registered vessels. Brief details of the mortgage are entered in the register, namely the type of mortgage, the date of creation and the date and time of registration, the name and address of the mortgagee, and the number of shares mortgaged.
The order of priority of mortgages is determined by their dates of registration. If two mortgages are registered on the same day, then the first one entered in the register will have priority over the other. A mortgage can be registered for a previously registered ship and a registered ship under construction. A priority notice can be given of a proposed mortgage, which will maintain priority of the interest.
The mortgage must be in statutory form (Merchant Shipping Act). The prescribed forms are the account current, principal sum and interest forms. It is usual to use the account current form as the principal and interest form only secures the principal sum and interest concerned. In addition to the principal sum and interest, the mortgagee usually wishes to secure sums that it may incur for protection of its security (for example, insurance premiums, and costs to maintain and repair the security). The account current form secures all monies currently owed by the mortgagor to the mortgagee. A mortgage can be registered in the BVI in advance of title to the ship that is being transferred to the borrower. Mortgages can also be registered for provisionally registered ships and ships under construction. A fee of US$250 is payable for registration of a ship mortgage.
Security can be taken over shares in BVI companies and this is a popular and frequently used form of security. This security can be granted under the governing law appropriate to the transaction. New York, Hong Kong or English law governed share charges are common. For an English law governed document, the application of the Financial Collateral Arrangements (No.2) Regulations 2003 to shares in a BVI company was confirmed by the Privy Council in Cukurova Finance International Limited and Cukurova Holdings A.S (Appellants) v Alfa Telecom Turkey Ltd (Respondent) [2013] UKPC 2.
Shares are in registered form and share security is typically taken by way of an equitable mortgage. A mortgage or charge of shares of a BVI company need not be in any specific form. However, it must clearly indicate:
The intention to create a mortgage or charge.
The amount secured by the mortgage or charge or how that amount is to be calculated.
Where the governing law of a mortgage or charge of shares in a BVI company is not the law of the BVI, the mortgage or charge must comply with the requirements of its governing law in order for the mortgage or charge to be valid and binding on the company providing the security.
The Companies Act provides a mechanism for particulars of a charge over shares to be noted on the register of members (of the BVI company whose shares are being charged), a copy of which the company can file publicly at the Registry (see Formalities).
Where a lender has taken security over the shares of a BVI company it is advisable to place a notation on the BVI company's register of members evidencing the existence of the security. This acts as a method of giving notice to third parties of the existence of the security if they review the register of members. It is also possible, where the commercial parties agree, for the annotated register of members to be publicly filed with the Registry and thereby recorded on the company's public corporate records.
Assignments of receivables are common.
Common forms of security include assignments of rental income or the benefit of insurances.
BVI statute does not provide for the legal assignment of intangibles such as a chose in action. There is also no statutory concept of a security assignment. Accordingly, an assignment of a receivable, including an assignment by way of security, will take effect as an equitable assignment as a matter of BVI law, unless agreed and consented to by the debtor. There are no other specific requirements (see Claims and receivables and Common forms of security).
A BVI company can give security over cash deposits held in its bank accounts in any jurisdiction. This is a common form of security, typically governed by the laws of the jurisdiction in which the bank account, and therefore the deposit, is held.
BVI law does not make statutory provision for collateral security over cash deposited in bank accounts located in the BVI and the co-operation of the account holding branch would be required. There are no other specific requirements (see Common forms of security).
The BVI has a local patents and trade marks registry. It is also possible to apply for local recording of patents and trade marks registered with the UK Intellectual Property Office. Community trade marks and registrations under the Madrid Protocol designating in the UK, however, do not have effect in the BVI.
Security over intellectual property in BVI is most frequently created under a debenture. Assignments of trade marks by way of security are not common.
Patents. The Patents Act 1906, together with the Patent Regulations 1906, set out the procedure and requirements for the registration of patents, and the rights and powers of those who register them.
Trade marks. The Trade Marks Act 1887, together with the Trade Marks Rules 1937, governs original applications for the registration of trade marks in the BVI, and the rights and powers granted following registration.
Registration of UK trade marks in the BVI. The Registration of United Kingdom Trade Marks Act 1946 and the Registration of the United Kingdom Trade Marks Rules 1947 govern the procedure for the registration of UK trade marks, and the applicant's rights and powers following registration.
(See Question 29 for reform proposals.)
Security can be granted by a BVI company over its future acquired assets.
Shares of the same class and series of a BVI company are fungible and it is common for security to be taken over these shares.
A mortgage or charge over shares in a BVI company that is licensed by the Financial Services Commission to carry out certain defined financial services business requires the prior consent of the Commission.
A mortgage or charge of a bearer share is not valid and enforceable unless the certificate for the bearer share is deposited with a custodian.
The consent of the BVI courts is required for the transfer of shares in a BVI company in liquidation.
(See also Questions 2, 3 and 5.)
Security granted by a BVI company is released in accordance with the applicable governing law. Where registration of the security has been made at the Registry, a notice of release can be filed by the company under section 165 of the Companies Act by either:
The company.
For security filed under the Companies Act since 1 January 2005, the chargee, or an authorised person on their behalf.
It is very common for the shares of a BVI company established as a SPV to be secured (see Question 4, Common forms of security).
These arrangements are determined by BVI law as contract matters enforceable in accordance with their terms.
See Question 5.
There is no specific BVI statute governing hire purchase arrangements. These arrangements are determined by BVI law as contract matters enforceable in accordance with their terms.
These arrangements are determined by BVI law as contract matters enforceable in accordance with their terms.
If the effect of a set-off provision under the applicable governing law is that one party is under a single obligation to pay an amount calculated on a net basis to the other party following the termination of outstanding obligations (set-off provision), then these provisions are effective under BVI law.
Insolvency set-off is recognised by statute (section 150, Insolvency Act 2003 (Insolvency Act)). However, the effectiveness of the set-off provision can be restricted in certain limited circumstances based on the provisions of the Insolvency Act as follows:
The rights of a creditor preferred under BVI law are restricted as a result of the operation of the set-off provision. There is an argument that the rights of the preferred creditor should prevail over the set-off provision. However, in the absence of specific case law authority in the BVI on this point, it is difficult to be certain.
The right of set-off under the set-off provision will be restricted to the extent that giving effect to that right deprives a secured creditor of one of the parties of a debt over which that creditor has taken security in circumstances where the security taken over the debt is not subject to the right of set-off under the set-off provision.
If the claim against one of the parties to the set-off provision is subordinated or deferred to other creditors, the right to set-off under the set-off provision will be restricted to the extent of that subordination or deferral.
It is common for a BVI company to give a guarantee, particularly for intra-group/parent/subsidiary obligations. Guarantees given by BVI companies are governed by the Companies Act and the company's memorandum and articles of association. Subject to its memorandum and articles of association, a company's powers include, among other things, the power to guarantee a liability or obligation of any person and secure any obligations by mortgage, pledge or other charge of any of its assets for that purpose.
Subject to its memorandum or articles of association a company's powers include the power to give financial assistance to any person in connection with the acquisition of its own shares.
A company, under the Companies Act and subject to its memorandum and articles of association, irrespective of corporate benefit:
Has full capacity to carry on or undertake any business or activity.
Can do any act or enter any transaction and, for those purposes, has full rights, powers and privileges.
If there is no benefit to the company, a transaction may be open to challenge in the event of the insolvency of the company, for example as a transaction at an undervalue (see Question 23).
There are no express restrictions. A company's directors has fiduciary and statutory duties to act honestly and in good faith, and in the best interests of the company. A director who is in breach of his duties may be liable to the company for the resulting loss to the company.
There is no applicable statutory usury or interest limitation law in the BVI. However, extortionate credit transactions (see below) are potentially vulnerable to hardening periods (that is, the periods in which the security is vulnerable to challenge) under the Insolvency Act.
If a company enters into a transaction for, or provision of, credit when it is insolvent, or if that transaction causes it to become insolvent, the transaction may be regarded as an extortionate credit transaction (Section 248, Insolvency Act). It is regarded as such if either, taking account of the risk accepted by the person providing the credit:
The terms of the transaction are or were such that required grossly exorbitant payments to be made for the provision of the credit.
The transaction otherwise grossly contravenes ordinary principles of fair trading.
For the above to apply, the transaction must have taken place within six months (or two years in the case of a connected person) of a petition being presented to the courts for the winding-up of the company.
Member's remedies were codified in the Companies Act. For example, if a company or a company director engages in, proposes to engage in or has engaged in conduct that contravenes the Companies Act or the company's memorandum or articles of association, the BVI court may, on application of a company member or director, make an order:
Directing the company or director to comply with the Companies Act or the company's memorandum or article of association.
Restraining the company or director from engaging in conduct that contravenes the Companies Act or the company's memorandum or article of association.
Lender environmental liability is not provided for by statute.
The validity of agreements to subordinate debt is specifically recognised by statute under section 151 of the Insolvency Act. This is often achieved by, for example, the junior lender giving an undertaking not to collect the junior debt, or compete in any proceedings, until the senior debt has been paid in full.
Structural subordination is possible and is typically achieved by lending at different levels of a group structure to take advantage of the priority of creditors over members.
The statutory order of priority of registered and unregistered charges under the Companies Act is expressly subject to agreement between creditors varying the statutory position.
Corporate debt is typically traded by way of transfer of convertible securities issued by a BVI company. Transfer would typically be a matter of adhering to contractual arrangements.
BVI courts recognise the role of an agent or trustee and support enforcement by a security agent/trustee in accordance with the provisions of the applicable security documentation.
BVI recognises the trust concept, which is a cornerstone of the jurisdiction, and is at the leading edge of developments in the law of trusts.
A security document will be enforceable in accordance with its terms. Where a security document, such as a charge over shares, is governed by BVI law, the Companies Act permits enforcement immediately when an event of default occurs.
A security document is enforceable by the method(s) provided for therein. Where a charge over shares is governed by BVI law, the Companies Act provides that the mortgagee or chargee is entitled to sell the shares subject to any limitations or provisions to the contrary in the instrument creating the mortgage or charge. The mortgagee or chargee is also entitled to appoint a receiver who, subject to any limitations or provisions to the contrary in the instrument creating the mortgage or charge, can until the mortgage or charge is discharged:
Vote the shares.
Receive distributions for the shares.
Exercise other rights and powers of the mortgagor or chargor in respect of the shares.
The Companies Act contains a statutory process for court approved "plans of arrangement". The company directors may approve a plan of arrangement that contains details of the proposed arrangement if they determine that it is in the company's or the company's creditors or members' best interests, even though the proposed arrangement may be authorised or permitted by any other provision of the Companies Act or otherwise permitted.
However, the plan of arrangement process is not frequently used. In addition:
The BVI Court has recently confirmed that it has no power to approve plans of arrangement that involve property forfeiture or confiscation. Guidance has been given on how to approach securities' holders and structure the plans before asking the BVI Court for approval (see In the matter of B&A Fertilizers Limited and in the matter of Rio Verde Minerals Development Corp BVIHC (COM) No. 132 of 2012).
The court is likely to question the use of the plan of arrangement provisions to achieve a transaction that may be achieved without court involvement. The court may not be inclined to make an order that it considers unnecessary under BVI law.
The court may permit members to object at the hearing, and to put counter arguments to the court, where they would not have an opportunity to do so under the company's memorandum and articles of association.
The court may permit members to dissent and redeem their shares for their appraised fair value.
An alternative to a plan of arrangement is a statutory, court approved scheme of arrangement. Where an arrangement is proposed between a company and its members or creditors, or any class of them, the court may, on the application of the company or a member (or an administrator or liquidator), order a meeting of the members or creditors or class of members or creditors, as the case may be, to be summoned in such manner as the court directs.
The two main advantages of a scheme of arrangement are that:
If a majority in number representing 75% in value of the members or class of members, present and voting either in person or by proxy at the meeting ordered by the court, agree to any arrangement, the arrangement, if sanctioned by the court, is binding on (among others) all the members or class of members, as the case may be, and also on the company and any liquidator of the company.
The dissent rights of members (to be paid out at fair value for their shares) do not apply.
The appointment of a liquidator against a company under the Insolvency Act brings about a moratorium on claims against the company, but this does not prevent the enforcement of security by a secured creditor.
In the event of the insolvency of a company, the rights of a creditor may be affected by the Insolvency Act as follows:
Unfair preferences. If a company enters a transaction when it is insolvent, or that transaction causes it to become insolvent (insolvency transaction), and puts the creditor in a better position than that creditor would have been, that transaction will be deemed an unfair preference (Section 245, Insolvency Act). It will be void if within six months (or two years in the case of a connected person) a petition is presented to the courts for the winding-up of that company. A transaction is not an unfair preference if the transaction took place in the ordinary course of business. This provision applies regardless of whether the payment or transfer is made for value or at an undervalue.
Undervalue transactions. The following will (if it is an insolvency transaction) be deemed an undervalue transaction and void if within six months (or two years in the case of a connected person) a petition is presented to the courts for the winding-up of the company (Section 246, Insolvency Act):
a gift;
a transaction for no consideration or where the value of the consideration for the transaction, in money or money's worth, is significantly less than the value in money or money's worth of the consideration provided by the company. A company does not enter into a transaction at undervalue if:
it is entered into in good faith and for the purposes of business; and
at the time the transaction was entered into, there were reasonable grounds for believing the transaction would benefit the company.
Voidable floating charges. A floating charge created by a company is voidable if it is an insolvency transaction and takes place within six months (or two years in the case of a connected person) of a petition being presented to the courts for the winding-up of the company (Section 247, Insolvency Act). A floating charge is not voidable to the extent that it secures, among other things:
money advanced or paid to the company, or at its discretion, at the same time as, or after, the creation of the charge; or
the value of assets sold or supplied, or services supplied, to the company at the same time as, or after, the creation of the charge.
Extortionate credit transactions. See Question 13, Usury.
Unless and to the extent that the Insolvency Act or any other enactment provides otherwise, the assets of a company in liquidation are applied (Section 207, Insolvency Act):
To pay, in priority to all other claims, the costs and expenses properly incurred in the liquidation in accordance with the prescribed priority.
After paying the costs and expenses of the liquidation, to pay the preferential claims admitted by the liquidator in accordance with the provisions for the payment of preferential claims prescribed.
After paying the preferential claims, to pay all other claims admitted by the liquidator.
After paying all admitted claims, to pay any interest payable under the Insolvency Act.
Subject to any subordination agreement in effect, the claims admitted by the liquidator rank equally between themselves if the assets of the company are insufficient to meet the claims in full, they will be paid rateably.
Any surplus assets that remain after paying the costs, expenses and claims referred to above will be distributed to the company members in accordance with their rights and interests in the company.
For the purposes of the Insolvency Act, assets held by a company in liquidation on trust for another person are not assets of the company.
If the assets of a company in liquidation available for payment of the claims of unsecured creditors are insufficient to pay the costs and expenses of the liquidation in accordance with the prescribed priority and the preferential creditors, these will have priority over chargees' claims for assets that are subject to a floating charge created by the company and will be paid accordingly out of those assets (Section 208, Insolvency Act).
Preferential creditors under BVI law are very limited and for most companies will primarily consist of outstanding annual fees payable to the Registry.
Subject to any provisions to the contrary in the instrument of mortgage or charge of shares of a company governed by BVI law, all amounts that accrue from the enforcement of the mortgage or charge shall be applied as follows:
Firstly, to meet the costs incurred in enforcing the mortgage or charge.
Secondly, to discharge the sums secured by the mortgage or charge.
Thirdly, to pay any balance due to the mortgagor or chargor.
There are no restrictions on the making of loans by foreign lenders or granting security or guarantees to foreign lenders.
There is no exchange control legislation under BVI law and accordingly there are no exchange control regulations imposed under BVI law on foreign lenders.
No taxes are payable to the BVI Government or other taxing authority in the BVI under the laws of the BVI for execution or delivery, or enforcement, of security documentation. If the company holds an interest in real estate in the BVI or other assets physically located in the BVI, there are certain perfection, licensing, registration and stamp duty considerations. No taxes need be deducted or withheld under the laws of the BVI from either:
Interest payable on loans made to domestic or foreign lenders.
The proceeds of a claim under a guarantee or the proceeds of enforcing security.
The BVI complies with the EU Taxation of Savings Directive through the automatic exchange of information on savings income with tax authorities in EU member states.
Not applicable (unless a BVI company has an interest in real estate in the BVI).
The Registry fee for filing (for priority purposes) particulars of a security interest on the register of charges maintained by the Registry is US$100 per registration.
Notaries' fees are nominal.
Not applicable.
The Trade Marks Bill 2013 seeks to repeal the Merchandise Marks Act, Registration of United Kingdom Trade Marks Act and Trade Marks Act and to make new provision for the registration and protection of trade marks in the BVI, and related matters including the assignment and charge of trade marks. The Bill expressly provides that a registered trade mark may be the subject of a charge in the same way as other personal or moveable property. Under the Bill, an assignment of a registered trade mark, including an assignment by way of security, will not be effective unless it is:
Made in writing.
Signed by or on behalf of the assignor or his personal representative.
The granting of any security interest, whether fixed or floating, over a registered trade mark or any right in or under it will be registrable by the Registrar of Trade Marks, Patents and Copyright in the BVI.
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T +852 3690 7435
F +852 2537 2955
E michael.gagie@maplesandcalder.com
W www.maplesandcalder.com
Professional qualifications. England and Wales, Solicitor, 1997 (non-practising); British Virgin Islands (Eastern Caribbean Supreme Court), Solicitor, 2003; Anguilla (Eastern Caribbean Supreme Court), 2003
Areas of practice. Corporate; commercial; banking; structured finance.
Non-professional qualifications. BA Hons, University College of North Wales, 1993
Languages. English
Publications. Institute of Chartered Secretaries, Hong Kong Lawyer, IFC Review, IFLR.
T +44 20 7466 1608
F +44 20 7466 1700
E matthew.gilbert@maplesandcalder.com
W www.maplesandcalder.com
Professional qualifications. England and Wales, Solicitor, 2002 (non-practising); British Virgin Islands (Eastern Caribbean Supreme Court), Solicitor, 2006
Areas of practice. Corporate; mergers and acquisitions; partnerships; joint ventures; debt and equity financings; property and asset financings; insurance and regulatory.
Recent transactions. Matthew advises banks and international finance institutions on all aspects of lending to BVI companies, including project and infrastructure financing, real estate financing, asset financing from superyachts to drillships, corporate jets and helicopters, and pre-IPO and acquisition finance.
Languages. English
Publications.
